The official results of the Obama administration’s stress test of the US’s 19 biggest banks are in – and the news is pretty good.
While 10 banks need to raise a total of $US75 billion to ensure they have adequate capital to get through a prolonged recession, the good news is that the remaining nine banks are in the clear, and the banking system as a whole is in reasonable shape.
The collapse of another bank looks to be highly unlikely, and there should be no need for the US Government to nationalise any of the banks.
“These examinations were not tests of solvency; we knew already that all these institutions meet regulatory capital standards … The results released today should provide considerable comfort to investors and the public,” the chairman of the Federal Reserve, Ben Bernanke said in a statement released this morning.
While some analysts claim that the stress tests may need to be carried out regularly over the course of the recession, most welcomed the results.
“Looking at the big picture, you can say that things aren’t so bad for the financial industry as a whole,” Kevin Logan, chief US economist at Dresdner Kleinwort, told The Guardian.
Bank of America was at the top of the list of banks that need to raise capital, and has been told to find $US33.9 billion, followed by Wells Fargo, which requires $US13.7 billion, and the finance arm of struggling car marker General Motors, which needs to raise $11.5 billion.
But big names such as JP Morgan and Goldman Sachs, which reported improved trading conditions in the first three months of the year, passed with a clean bill of health.
The sobering piece of news from the stress test was an estimate that the 19 banks could lose a whopping $US600 billion in 2009 and 2010 if the economy were to be hit be another series of financial shocks, and consumers and banks started to default on credit card payments and mortgages.
But the US Treasury Secretary Tim Geithner says investors can be confident the financial system is well placed to get back to the “business of banking”.
“There are very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward. The results will be, on balance, reassuring.”
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James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
