Final Grades For Stress Tests
After months of speculation, the veil will be lifted on Thursday. What should you expect from the official results of the bank stress tests?
Bank stress, first introduced in February, are at the center of the Obama administration's plan to stabilize the financial system.
19 of the nation’s largest financial firms have been tested to see if they could handle a "what-if" scenario involving a worsening recession: 10.3 percent unemployment and a 22 percent drop in home prices over the next two years.
According to published reports, banks will need a total of $75 billion in additional capital to survive that scenario. However, not all that money is needed equally with some banks needing little or even no additional capital.
Head of the Class
Analyst Keith Horowitz of Citigroup says Bank of New York Mellon, Goldman Sachs and State Street probably scored the best on the stress tests. Despite the current run in their stocks, he still believes valuations for these remain attractive.
The biggest blockheads are likely to be Bank of America , which is widely expected to need $34 billion and Well Fargo, which probably needs $15 billion.
However Citigroup’s Keith Horowitz forecasts a number of other problem children. He says KeyCorp, Regions Financial and U.S. Bancorp are among 10 banks in need of more capital.
Although these results were expected Monday, the 19 financial institutions were permitted a grace period to refute the findings.
It’s important to note that regulators and internal auditors routinely use stress tests to manage bank risk. The tests, typically done in private, help guide investments and ensure the banks' stability. Normally, regulators disclose their evaluations and remedies with banks behind closed doors.
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