The Federal Reserve will reportedly postpone the release of results of the stress tests on the nineteen biggest U.S. banks, while regulators negotiate the results and any capital recovery plans with the banks. The results of the stress tests, originally slated to be announced on May 4, may not be revealed until toward the end of next week, according to media reports Thursday.
The preliminary results were conveyed to the banks last week. Regulators are now negotiating the results and any capital recovery plans with the banking companies.
The tests began in late February as a way to determine whether or not banks had sufficient capital to navigate the difficult financial environment. According to a Fed study released April 24, the banks in the test hold two-thirds of the assets and more than half of the loans in the U.S. banking system.
As part of the tests, the banks were asked to project their credit losses and revenues for 2009 and 2010. The tests also involved estimates on the eventual losses due to defaults on a wide variety of assets, particularly mortgage-backed securities. The assessments calculated the capital buffer the banks will need to keep making loans even if the economic downturn worsens in the current year and next.
At least six of the banks require additional capital, reports said, quoting people briefed on the matter. While some of the banks may need additional cash infusions from the government, most of the capital is likely to come from the conversion of preferred shares to common equity. Banks found to have inadequate capital will reportedly have six months to raise the money.
The Wall Street Journal reported earlier this week citing people familiar with the situation that the U.S. government told financial services firms Bank of America Corp. (BAC) and Citigroup, Inc. (C) they may need to raise more capital. Quoting people familiar with Bank of America, the report stated that capital shortfall at the bank amounted to billions of dollars.
Industry experts have also predicted that some regional banks, especially those with big commercial real-estate loan portfolios, are also likely to fare poorly on the stress tests.
Regulators and bank executives are worried about how the disclosure of the stress tests will be handled due to the market's sensitivity to the information. Weaker institutions could suffer a collapse in their stock prices. Leaked reports of the results and outside analysts' versions of the tests have already punished some bank stocks.
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