U.S. Presses Some Banks to Act After Stress Tests

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APRIL 24, 2009, 8:33 P.M. ET
U.S. Presses Some Banks to Act After Stress Tests Article

By DAMIAN PALETTA, DAVID ENRICH and DEBORAH SOLOMON

WASHINGTON -- Federal officials are pushing several of the country's largest banks to bolster capital reserves, people familiar with the matter said, as regulators try to repair bank balance sheets and the public image of the U.S. banking sector.

The identities of the banks, among the 19 institutions that were subjected to federal "stress tests," couldn't be learned. Analysts believe they likely include regional banks with large exposures to commercial real estate in the Midwest and Southeast. Three people familiar with the matter said at least three banks are in this position.

More on Stress Tests
For Investors, the Stressing GameStress-test methodology | Fed statementList of banks undergoing stress testsRegulators See Risk in U.S. Bank StakesStress Tests Flash a Lot More RedDeal Journal: Government's Inexperience Is on DisplayGovernment officials believe most banks in need can improve their capital footing without taking money from the government bailout fund. This would be done by raising funds from private investors or converting the government's existing investments in banks into a new type of equity that would better cover banks in case of future losses.

In the latter scenario, the U.S. could end up owning large chunks of banks, raising the specter of something akin to nationalization. Federal officials have said any such move would be temporary. Some banks could end up requiring a cash infusion from the Treasury.

In February, the Obama administration said 19 bank holding companies with more than $100 billion of assets would have to undergo a stress test. The move was designed to calm fears about the solvency of the banking system. The exams, conducted by more than 150 federal regulators, analyzed potential losses from residential mortgages to complex securities products.

Regulators want banks in the future to be able to maintain an additional "buffer" of capital above the minimum standards, a Federal Reserve official told reporters Friday. The official wouldn't identify the specific buffer.

The Fed released the methodology for the tests Friday, although didn't provide many of the specifics that bank investors and analysts had been seeking.

In embarking on the tests, government officials are walking a tightrope. The move could have the opposite its intended effect and raise public fears that banks ordered to raise more capital are on the verge of collapse. The Fed specifically said Friday that needing to boost capital should not be viewed as "a measure of the current solvency or viability of the firm."

Banks will have several days to challenge the findings before the government makes results public the week of May 4. In a briefing, White House spokesman Robert Gibbs said it was his "understanding" that the banks themselves would release specific results.

Under the tests, all 19 banks are all believed to be "well capitalized" by current standards. The tests, however, pushed banks to determine what their conditions would look like if the economy worsened precipitously.

Fed officials met Friday with top management at the country's biggest banks, from Citigroup Inc. in New York to Wells Fargo & Co. in San Francisco, to go over the results.

Fed officials and some of the banks wrapped up in less than 60 minutes; others dragged on for several hours, according to people familiar with the matter. Participants were told to keep mum on what was discussed.

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