Stress tests show 10 big banks must raise total of $75 billion
— -- Three months of intense anticipation ended Thursday when the Obama administration said stress tests found that 10 of the largest U.S. banks will have to raise a total of $75 billion to prepare for losses that could come from a deepening recession.
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke emphasized the tests were not for solvency, but to find a way to strengthen the banking system and ensure that it wouldn't crumble.
"This process will provide reassurance and clarity ... which will make it easier for banks to raise private capital and ultimately, to repay the government," Geithner said.
More than 150 examiners from the Fed and related bank regulatory agencies tested loan portfolios of the 19 largest banks to see what kind of losses they would incur in an adverse economic scenario, including unemployment topping 10.3%.
They found that losses at the 19 banks could total $600 billion during 2009 and 2010, which amounts to 9.1% of total loans, a loss rate that's higher than during the peak loss years of the 1930s.
Attempting to address criticism that the stress tests weren't rigorous enough, Comptroller of the Currency John Dugan said the tests were conducted using very stringent scenarios. He said they're reflected in the loss rates that are higher than "the worst two-year period of the Great Depression."
While a $75 billion capital shortfall isn't a small number, some private estimates are much more dire. The International Monetary Fund, for instance, estimated that U.S. banks will need $275 billion more to work through losses of $2.8 trillion through next year. Geithner said the IMF's assumptions didn't take into account that many of the banks posted profits in the first quarter and took other steps to improve capital.
