Stress Test Score: Banks Need $75B More

Regulators provided an aggregate assessment of the banks on the whole as well as an individual breakdown of the specific institutions. This information included estimated losses for certain loans and outlined the resources to absorb these losses under a worse-than-expected economic scenario.

Banks will have to produce plans detailing how they will raise the capital necessary to withstand possible losses in the future.

The banks will have to submit these plans within 30 days and enact them within six months, according to a government statement issued Wednesday. The banks will also be expected to detail how they plan to repay the billions in government funds they have already received.

Are the Stress Tests Stressful Enough?

Earlier this week FBR Capital Markets attempted to replicate the government's tests to predict how banks would fare. Based on the FBR assessments, 11 of the 12 commercial banks that were tested will have to raise more capital. FBR did not profile non-commercial banks like Goldman Sachs because it anticipates that most, if not all, of them will pass the tests.

According to FBR's assessment, the only commercial bank to emerge unscathed from the replicate tests was JP Morgan Chase. Others came out in far worse shape. FBR estimated that Bank of America, for example, will need to raise around $19 billion in additional capital, and Wells Fargo will need over $12 billion.

"I think the banks still need a lot of capital," said FBR's Paul Miller. "I don't think the stress tests are stressful enough."

But after the demise of Lehman Brothers last September, Miller said policy-makers in Washington are not prepared to let any other major banks collapse.

"The government is basically saying we're not going to fail these giant institutions anymore because what's happened to Lehman has scared the living daylights out of them," Miller said. "I do think that failing some of these institutions is not as bad as the market or the government thinks it will be, but I know they're so afraid after what happened to Lehman…so what it means is that you're going to put a lot more capital into them."

"The government needs banks to go up because they don't have the money to fix them," he added. "And if they can raise confidence in these banks and get banks to raise money in the private sector, that fixes a giant headache on Capitol Hill."

But this plan, Miller said, will not work. Instead, the only solution for the government is to spend the necessary money to temporarily take over the banks and rid them of their toxic assets.

"The government has a patchwork of policies that is leading us to jump from crisis to crisis to crisis instead of doing what's really needed and that is to close down some of these institutions, take the bad assets off their balance sheets, form a ["bad bank"], and then sell these banks back out to the Street, but the government doesn't want to do it because it's expensive."

Too Big to Fail

Although many of these larger banks have been deemed "too big to fail," the effects of the nation's recession can be seen in the failures of smaller banks. Thus far this year 31 community banks have already collapsed under the weight of the recession, and the Federal Deposit Insurance Corporation expects dozens more before the end of the year.

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