The U.S. government says 10 of America's biggest banks need a total of $75 billion in additional capital to survive if the recession deepens. The disclosure is contained in the results of so-called "stress tests" for top lending institutions that were announced Thursday.
Since last October, the U.S. government has spent hundreds of billions of dollars to prop up ailing American banks and other institutions in hopes of rescuing the nation's battered financial system and unfreezing tight credit conditions that were choking the economy.
The effort seems to have worked -- to a point. Although several well-known American banks and financial institutions failed last year, a complete collapse of the U.S. banking sector did not occur, and signs of improved credit flows have since emerged.
Even so, the threat has not ended, particularly if the current economic recession drags on or worsens. That is the message delivered by the Obama administration and the U.S. central bank, which collaborated on an exhaustive effort to review the health of America's 19 biggest private lending institutions.
Nine of the 19 were deemed safe from failure in the event of further economic shock. But 10 others must boost their capital reserves to provide a cushion in case economic conditions grow worse. Chief among them is America's largest retail bank, Bank of America, which is now tasked with raising nearly $34 billion. Wells Fargo needs $13.7 billion, while Citigroup must raise $5.5 billion.
Appearing alongside Federal Reserve Chairman Ben Bernanke, U.S. Treasury Secretary Timothy Geithner struck a cautiously optimistic tone.
"The leaders of our nation's banks have a lot to do to earn back the public's trust. Things are improving in financial markets, but we have a long way to go. It is just the beginning, and we are going to keep working to try to make sure this financial system is in a stronger position, stronger position so it can provide the credit necessary for recovery," he said.
Some economists have questioned whether the stress tests were rigorous enough to provide a true gauge of health of America's banking sector.
Where will banks obtain the additional capital they need? Most funds from a massive $700 billion federal rescue package have already been spent. The Obama administration says it is not inclined to ask Congress for additional funds, and that banks will have to rely primarily on private sources to raise capital in the future. As stress test results were being released, several lending institutions announced common stock offerings to raise cash.
In other economic news, the number of newly-laid off Americans applying for jobless benefits fell to a 3-month low last week, although the cumulative number of Americans getting unemployment checks remains at an all-time high. U.S. retail sales edged higher in April, while U.S. consumer borrowing fell in March. U.S. productivity gains slightly exceeded most analysts' expectations in the first quarter of the year.
Thursday Wall Street's Dow Jones Industrial Average closed down 102 points, or 1.2%.
