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Bank Stress Test4/22/09 - U.S. regulators want the top 19 banks being stress-tested to have at least 3 percent tangible common equity. Tangible common equity (TCE) is a measure of capital strength that has been commanding more investor attention. It looks at how much common equity is supporting a company and ignores intangible assets such as goodwill, on the theory that, in bad times, intangible assets are less likely to have value. There has been little consensus on what a bank's appropriate TCE ratio should be. Some argue it should be above 5 percent or 7 percent. Many major banks have had TCE ratios below 3 percent. Regulators are in the final stages of the examinations in which the 19 largest banks are being tested to see how they would fare should the U.S. recession prove unexpectedly severe. An official at the Federal Reserve said last week that some results of the stress tests will be revealed on May 4. Regulators will try to prove the rigor of the tests by releasing a document on April 24 that will explain the underlying assumptions. The test results will include a capital recovery plan for banks that are deemed short of capital if the economic downturn accelerates. One way to raise tangible common equity at banks that have received capital infusions from the government would be to convert the government's preferred shares to common equity. 2/25/09 - U.S. banking regulators launched a "stress test" program to assess the largest banks' ability cope with the possibility of a deeper recession in which the unemployment rate climbs above 10 percent next year. The stress tests, mandatory for the roughly 20 institutions with over $100 billion in assets, will be used to determine whether the banks need more capital from a new U.S. Treasury program for government preferred stock investments that can be converted into common equity. The new Treasury program, known as the Capital Assistance Program, will be placed alongside a previous program that has injected nearly $200 billion into banks since last October. Both will draw from remaining funds in the Treasury's $700 billion financial rescue fund. The stress tests, to be conducted by end of April by the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision, will measure banks against two economic scenarios. The first or "baseline" scenario is based on the consensus of private forecasters for the economy and the second or "more adverse" outlook anticipates a longer and deeper recession. Regulators will conduct "an assessment of all these banks to try and figure out how much capital they need to meet even that weaker scenario," Federal Reserve Chairman Ben Bernanke told the U.S. House of Representatives Financial Services Committee. "Banks will be told how much capital they need to raise, if any. Some will not need any capital, but some will," he added. Bernanke said banks will first have the opportunity to try to raise capital in the private market, but if they cannot do so, the Treasury will offer to buy convertible preferred shares in the bank. If losses grow, this can be converted to common equity, giving the government a direct ownership stake and enhancing the bank's ability to absorb writeoffs. The Treasury does not intend to disclose the results of the stress tests, leaving that decision up to banks. It said banks found by the stress tests to need more capital will have six months to either find private funds or take money from the Treasury which will charge a 9.0 percent annual dividend rate. A government official told a background news briefing it was "important" that such banks do one or the other, but did not say what would happen if they refused. Officials said the extra, temporary capital cushions would most likely be around one to two percent of an institution's risk-weighted assets, but there was no explicit limit the amount of capital the Treasury would give to large banks. Analysts said the stress-test scenarios were not as onerous as some had feared. |
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