Nasty, brutish, short

7 May 2009 By Rob Cox Follow @rob1cox

Some local heavyweights FifthThird, SunTrust, Regions and KeyCorp fared poorly in the stress tests. Even if they recapitalise they ll be weakened creatures. It s in the interests of regulators to encourage healthy banks like US Bancorp, PNC and BB&T to take them over.

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The US Treasury released the results of its stress test of 19 banks on May 7. The banks tested included American Express, Bank of America, BB&T, Bank of New York Mellon, Capital One, Citigroup, Fifth Third, GMAC, JPMorgan, KeyCorp, Metlife, Morgan Stanley, PNC, Regions, State Street, Sun Trust, USB, and Wells.

Ten of the 19 banks need a total of $75bn of new capital, including Bank of America, Citigroup, FifthThird, GMAC, KeyCorp, Morgan Stanley, PNC, Regions Financial, Sun Trust, and Wells Fargo. Several banks have already said they would raise common equity.

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.

The most stringent loss assumptions were made on the first lien subprime mortgages, which the test said could fall as much as 28% over the next two years, closedend junior lien mortgages, which could fall as much as 25%, and credit cards, which could fall up to 20% over the next to years.

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