Regular check-ups

11 May 2009 By Rob Cox Follow @rob1cox

The examinations forced various regulatory bodies to cooperate. And comparing banks against each other mitigated the Lake Wobegon effect, where everybody in isolation is above average. However it’s structured, that’s what a revamped prudential oversight regime should do.

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Ten of the 19 banks subjected to stress tests by US regulators last week are being forced to raise a total of $75bn of new capital, including Bank of America, Citigroup, Fifth Third, GMAC, KeyCorp, PNC, Regions Financial and SunTrust.

On Friday, Wells Fargo raised $8.6bn in a stock offering. Morgan Stanley will probably have hauled in $4bn when its own stock offering is finally closed.

The Treasury tested banks using what it called the more adverse loan loss assumptions. If the economy tracked this adverse scenario, the losses at the 19 firms during 2009 and 2010 could reach $600bn. Over 75% of this could come from losses on accrual loan portfolios, particularly in residential mortgages and other consumerrelated loans.

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