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Stress tests find 10 big banks need $75B more

(Agencies)
Updated: 2009-05-08 08:13

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"Looking at the big picture, you can say that things aren't so bad for the financial industry as a whole," said Kevin Logan, chief US economist at Dresdner Kleinwort.

But Logan said attracting fresh capital will be a challenge for banks that need it.

"The banking industry is not going to make a lot of money going forward, and that's a dilemma for keeping banks solvent and getting them lending," he said.

Financial stocks surged in after-hours trading, after the report was released at 5 p.m. Citigroup shares jumped 8.4 percent to $4.13, while State Street rose 7.3 percent to $40.60. Earlier, the markets had been down.

The government's unprecedented decision to publicly release bank exams has led some critics to question whether the findings are credible. Some said regulators seemed so intent on sustaining public confidence in the banks that the results would have to find the banks basically healthy, even if some need to raise more capital.

Jaidev Iyer, a former risk management chief at Citigroup, said regulators are playing to public expectations, which could put the government in the role of creating "winners and losers."

Because the government has said it won't let any firm fold, that could put taxpayers on the hook more than a confidential test would have, he said.

"If there is in fact no appetite to let losers fail, then the real losers are the market at large, the government and the taxpayers," Iyer said.

In the tests, the Fed put banks through two scenarios for what might happen to the economy.

One reflected forecasters' current expectations about the recession. It assumed unemployment will reach 8.8 percent in 2010 and house prices would decline by 14 percent this year.

The second scenario imagined a worse-than-expected downturn: Unemployment would hit 10.3 percent and house prices would drop 22 percent.

The steeper downturn would make it harder for consumers and businesses to repay loans, which would cause banks' assets to lose value. The government is forcing the banks to keep their capital reserves up so they can keep lending even if the economic picture darkens.

But some analysts questioned whether the tests were rigorous enough. Economic assumptions have changed since the test was designed in February. The US jobless rate has risen to 8.5 percent and is projected to go higher this year.

"The assumptions the government has used are likely not to be completely accurate," said Jason O'Donnell, a bank analyst with Boenning & Scattergood Inc.

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