Thursday, May 7, 2009

Stress Test of US Largest Banks

Regulators have advised Bank of America that it will need $34 billion of capital to weather a deep economic downturn according to the yet to be released stress test of banks.

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According to these tests, Citigroup may need $10 billion. And about 10 of the 19 big U.S. banks included in the stress-tests may need more capital to weather the economic downturn.

The results of the stress tests are due out on May 7th.

Although government officials have toned down the outcome of the stress tests, results of the tests may make investors nervous if the outcome of the tests are worse than feared.

Bank of America's test results will most likely add pressure on its CEO Kenneth Lewis, who was ousted as chairman last week in a shareholder vote. results may lead to his departure from Bank of America, a company which he has served for 40 years, including the last eight as CEO.

Other banks that may need capital include Wells Fargo & Co, Fifth Third Bancorp, GMAC LLC, KeyCorp, PNC Financial Services Group Inc Regions Financial Corp and SunTrust Banks Inc.


The government has spent three months stress testing 19 of the largest U.S. banks to determine whether they would require more capital if economic conditions worsen.

Bank of America may raise capital through various means such as by selling assets, issuing more common stock etc. Bank of America has already received $45 billion in government assistance.

Citigroup analyst Keith Horowitz revised his price target for the Bank of America shares to $14 from $10, stating that he thought the bank required a "substantial increase" in common stock.

Bank of America is struggling with its controversial January 1 takeover of Merrill Lynch as well as heavy credit losses. The bank's CEO stated in April that credit is "going to get worse."

One way of raising capital is for Bank of America to sell some or all of its 16.6 percent stake in China Construction Bank Corp, China's second-largest bank. And it could sell its First Republic Bank business.

If Bank of America cannot sell enough assets to raise the required capital, it may be forced to convert some of its preferred shares held by the government into common stock, leading to what would be nationalisation of the bank with the government as its largest shareholder.

Fed Chairman Ben Bernanke said most banks needing capital can raise it through "either issuance of new capital or through conversions and exchanges, or the sales of assets and other measures."


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