Saturday, April 25, 2009

Stress test results

The much awaited stress results, not publicly announced but shared privately with the 19 banks that underwent the tests, have turned out to a damp squib as expected. The Fed announced that though the banks had enough capital to offset a raft of new losses, it would still need a new cushion of financing on top of the current minimum levels as a buffer against higher losses if the economy worsened. This strengthens the widely held belief that the government would support the largest banks even if their financial health eroded and that the banks may be forced to dilute their common stock in exchange for further equity infusions from the government.

There are also indications that the events till date may have widened the gap between the stronger set of banks led by the major investment and custodial banks like Goldman, Morgan Stanley, JP Morgan Chase, US Bancorp etc and the embattled majors like Citigroup, Bank of America, and Wells Fargo and the regional banks. However, the financial sleight of hand that dressed up the better than expected last quarter results among some of the banking majors, means that even those perceived as being better positioned may only be illusory.

The Fed also released the details of the parameters used in the stress tests, available here (and here).

No comments: