Banks Must Raise $74.6 billion; Losses From Bad Loans Could Total $600 billion

May 7, 2009 - The banking sector is secure, but banks’ credit losses over the next two years could total $600 billion, and reach worse losses than banks suffered at the height of the Great Depression. That’s the long anticipated result from controversial stress tests by federal regulators on the 19 largest financial institutions, released Thursday.

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According to the reports, roughly $455 billion of this total could come from residential and consumer-related losses (including credit cards). The rest of the total made up of losses from trading divisions and investment portfolios.

If the scenario predicted by the report comes to pass, total loan losses could hit 9.1% of total outstanding loans, higher than losses experienced by banks in 1931-1932.

The report indicates that 10 institutions have been ordered to raise $74.6 billion in private capital over the next seven months, including Wells Fargo and Morgan Stanley, who have already announced plans for raising capital. Treasury Secretary Timothy Geithner contends that because credit losses will continue across asset classes, banks will need strong capital to weather these losses.

Despite the big numbers and what could be perceived as desperate straits, the test results are actually a positive indicator, concluded Fed Chairman Ben S. Bernanke.

“The results released today should provide considerable comfort to investors and the public,” Bernanke said in a statement. “The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario.”

Banks that need to raise capital have until June 8th to present a plan, and until Nov. 9 to raise the capital. Experts believe that banks will raise their capital by selling shares to private investors, selling assets like mutual fund divisions, and by seeking to convert holdings by bondholders and private preferred shareholders into common shares. Banks may be forced to accept expanded federal ownership as well.

Bank of America Corp. was judged to need $33.9 billion in additional capital under regulators’ criteria. Wells Fargo & Co.’s shortfall is $13.7 billion, while Citigroup Inc.’s gap is $5.5 billion.

Among the other banks, Fifth Third Bancorp’s capital need is $1.1 billion, KeyCorp’s is $1.8 billion, PNC Financial Services Group Inc.’s is $600 million, Regions Financial Corp.’s is $2.5 billion and SunTrust Banks Inc.’s is $2.2 billion. GMAC LLC needs $11.5 billion, while Morgan Stanley’s assessment was $1.8 billion.

Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of New York Mellon Corp., MetLife Inc., American Express, State Street Corp., BB&T Corp., US Bancorp and Capital One Financial Corp. were deemed not to need additional funds, according to the results.

For Further Reading:
http://www.marketwatch.com/news/story/Stress-tests-reveal-capital-gaps/story.aspx?guid={754FEF5D-53E4-4653-9942-6C2318049143}
http://www.bloomberg.com/apps/news?pid=20601087&sid=ai4UCrdLwf2Q&refer=home
http://www.federalreserve.gov/

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