10 US banks need to boost capital to meet stress tests

Federal Reserve chairman Ben Bernanke said the results released Thursday "should provide considerable comfort to investors and the public," despite the need for new capital in 10 of the 19 banks subjected to the process.
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Bernanke pointed out that the Treasury "stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn."
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The central bank, which conducted the tests at the request of President Barack Obama's administration, said they showed the banks can withstand an adverse economic scenario but will be required to raise fresh capital to boost their reserves against losses.
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Treasury Secretary Timothy Geithner said in a statement the tests "will help replace the cloud of uncertainty hanging over our banking system with an unprecedented level of transparency and clarity."
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Among the 19 banks tested, Bank of America had the largest need at $33.9 billion, followed by Wells Fargo with $13.7 billion.
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Bernanke said nearly all the banks have sufficient capital "to absorb the higher losses envisioned under the hypothetical adverse scenario."
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But he noted the 10 firms judged to have shortfalls "need to enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress."
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The report projected potential losses of $600 billion in 2009 and 2010 for the banks under an "adverse" economic scenario.
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This would require $185 billion in new capital, but the banks have already raised or made provisions for $110.4 billion, leaving a possible shortfall of 74.6 $billion.
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GMAC, the former finance arm of General Motors, was seen as needing $11.5 billion, while Citigroup needed $5.5 billion. The others included Regions Financial ($2.5 billion), SunTrust ($2.2 billion), KeyCorp ($1.8 billion), Morgan Stanley ($1.8 billion), Fifth Third ($1.1 billion) and PNC ($600 million).
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Those not in need of new capital were American Express, BB&T, Bank of New York Mellon, Capital One, Goldman Sachs, JPMorgan Chase, MetLife, State Street and US Bancorp.
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Some banks immediately announced plans to raise new capital through share offerings or by exchanging some preferred shares for common stock, which is seen as a better buffer.
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Wells Fargo said it would launch an offering of a billion dollars of common stock.
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Morgan Stanley said it had "commenced a public stock offering of two billion dollars" and would seek to repay the US Treasurys investment "as soon as possible."
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Morgan Stanley also said it would offer $3 billion in bonds not guaranteed by deposit insurance.
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Bank of America said it would meet regulator demands through sales of assets and other actions that allows it to repay the US Treasury.
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In order to meet the requirement for core capital, the banking giant said it "intends to sell common stock and/or convert existing privately held preferred stock into common shares."
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Citigroup unveiled a plan to shore up its capital base by exchanging preferred shares for common ones, saying the move would limit the US government stake in Citi to 34 percent.
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Analysts said the overall shortfall is not as bad as feared by some.
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"The additional capital requirements specified today are not particularly burdensome, and none of the banks should have any major problems reaching the indicated targets," said economist Brian Bethune at IHS Global Insight.
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But despite "a better-than expected picture" of the banks, he said "credit markets are a heck of a long-way from functioning normally and in a manner that would be constructive for economic recovery."
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Bethune said that although the banks can survive, the Fed "will need to maintain maximum forward thrust... for several more quarters in order to nurse the credit markets back to a recovery mode."
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Adolfo Laurenti at Mesirow Financial said that "at this point the market and everyone should be confident we know exactly what will happen in the worst case scenario and its something we can provide for."
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But the documents released by the Fed, he said, left open many questions on how officials calculated their economic and loss assumptions.

"I dont think the government did a good job to provide the underlying numbers and assumptions on what these numbers are based," said Laurenti.