Bank Stress Test Results Released

Last night, as noted in this joint press release issued by the Federal Reserve, OCC and FDIC, the banking regulators released the results of their stress tests [more formally called the Supervisory Capital Assessment Program (SCAP)] on 19 of the largest bank holding companies in the U.S.

As noted on printed pg 3 (pdf pg 4) of the SCAP -Overview of Results , "[W]hile nearly all the firms have sufficient Tier 1 capital to absorb the unusually high losses of the more adverse scenario and still end 2010 with a Tier 1 risk‐based ratio in excess of 6 percent, 10 of these firms had capital structures that are too strongly tilted toward capital other than common equity. Thus, each of the 10 firms needing to augment their capital as a result of this exercise
must do so by increasing their Tier 1 Common capital."

For quick reference, the list of the 10 bank holding companies directed to raise capital (and the other 9 bank holding companies in the SCAP program) can be found in the Dow Jones Newswire summary carried on CNN.com: At a Glance: Stress Tests Show 10 Banks Must Raise $75 Billion."

Those banks asked to raise capital as a result of the SCAP assessment have been given a specific timeframe to do so, as described in the banking regulators joint press release: "The estimates reported by the Federal Reserve represent values for a hypothetical 'what-if' scenario and are not forecasts of expected losses or revenues for the firms. Any BHC needing to augment its capital buffer at the conclusion of the SCAP will have until June 8th, 2009 to develop a detailed capital plan, and until November 9th, 2009 to implement that capital plan."

Besides the SCAP overview report released yesterday, additional context was provided in stress test methodology released prior to the release of the actual results, and in yesterday's Statement by Fed Chairman Ben Bernanke,

• These examinations were not tests of solvency; we knew already that all these institutions meet regulatory capital standards.
• Rather, the assessment program was a forward-looking, "what-if" exercise intended to help supervisors gauge the extent of the additional capital buffer necessary to keep these institutions strongly capitalized and lending, even if the economy performs worse than expected between now and the end of next year.
• Roughly half the firms... need to enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress.
• Many of the institutions have already taken actions to bolster their capital buffers and are well-positioned to raise capital from private sources over the next six months.
• However, our government, through the Treasury Department, stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn.

Further information can be found in statements issued by U.S. Treasury Secretary Tim Geithner , FDIC Chair Sheila Bair, and Comptroller of the Currency John Dugan (Dugan's statement in particular provides a high level summary of seven key points in connection with the stress tests).

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