Stress Test Results: 10 Banks Need More CapitalEx-FDIC Chair Warns 'Do Not Politicize Banking Regulation' The stress test results are in, and the news is that of the 19 banks evaluated, 10 will need to raise additional capital -- another $75 billion in total. These stress tests were seen as a major indicator of the level of stability in the banking industry, which is held as a foundation to the country's recovery from the recession.
The banks that need to raise cash are: Bank of America, $33.9 billion; Wells Fargo, $13.7 billion; GMAC, $11.5 billion; Citigroup, $5.5 billion; PNC, $600 million, Regions Financial, $2.5 billion; SunTrust, $2.2 billion; Fifth Third, $1.1 billion; Key Corp., $1.8 billion; and Morgan Stanley, $1.8 billion.
The nine banks told that they passed the stress tests and don't have to raise additional capital include JP Morgan Chase and Goldman Sachs. The other seven banks that won't need to raise added cash are MetLife, U.S. Bancorp, Bank of New York Mellon, State Street, Capital One, BB&T and American Express.
The release of the results was anti-climactic, as several news leaks from the results through the week leading up to Thursday's announcement showed which banks were going to be on the "fail" list.
Federal regulators haven't said outright that the banks have failed or passed, but the order to raise added capital shows the 10 need to have it to withstand further deterioration in the country's economic outlook. Wells Fargo has already begun raising the capital and announced a $6 billion offering of common stock this morning. The bank says it will raise additional cash through operations-generated earnings.
Secretary of the Treasury Tim Geithner says of the stress test results, "This is just a beginning -- our work is far from over. The cost of credit remains exceptionally high, and businesses and families across the country are still finding it too hard to borrow to meet their needs."
Geithner states that regulators are continuing to execute the aid programs to relieve the burden of legacy assets, help small businesses and community banks, and tackle the mortgage and foreclosure crisis. The ultimate purpose of these programs is to ensure that the financial system supports rather than impedes economic recovery.
Other things need to happen for the financial institutions to be stabilized, says former FDIC Chairman William Isaac, who is chairman of Global Financial Services at LECG, a financial services risk management consulting firm. Isaac says the Financial Accounting Standards Board (FASB) agreed in its reforms not to keep charging "mark-to-market" (MTM) losses against earnings (only the credit losses would be charged against earnings). "But FASB continues to require that the MTM losses be charged directly against capital without going through the income statement. This is very bad accounting and very bad public policy and is continuing to destroy tangible equity in banks. FASB needs to cease immediately this senseless destruction of bank capital."
The lessons that the White House and the federal regulators can learn from the Savings and Loan crisis of the 1970s and 1980s are many, notes Isaac. "The most important one for present purposes is that the Treasury and the White House need to stop directing bank supervision and crisis management and let the professionals in the independent banking agencies do their jobs," Isaac says. "We must not politicize bank regulation."
The problems in the financial system this time around should have been much easier to contain than the massive problems faced during the 1980s and early 1990s, when 3,000 banks and thrifts failed, including many of the largest banks and thrifts in the country (nine of the 10 largest Texas banks, for example), Isaac explains. "Those banking problems were handled in a way that did not rattle the markets and the public, unlike today. I believe that the independent banking agencies have the experience to handle severe situations, and they should have been in the lead role instead of the Treasury and the White House," he notes. He says to Google the 'Keating Five' "if you want one example out of hundreds of what happens when politicians get involved in regulation of banks."
Isaac also doesn't see that the big banks should be "broken up" or made to change their business models, despite the need for some, including Bank of America, to raise added capital. "I would note that Bank of America has the best banking franchise in the world. I think it would be insane to destroy any more of our leading financial companies that are the envy of the world," he states. Bank of America does not need more capital even in the severe scenario under the stress test, he notes.
As for the remaining $110 billion in bailout funds, Isaac says it should be reserved until a genuine crisis occurs -- which he doesn't see happening. "Keep the powder dry," Isaac says. "In the meantime, I would make it relatively easy for the banks to repay the TARP money they have taken so we can give the money back to the taxpayers as quickly as possible."