Geithner Assures on Banks; ECB Measures Eyed

No U.S. banks screened by regulators face the risk of insolvency, Treasury Secretary Timothy Geithner said, giving markets another reason to rally after encouraging U.S. jobs and European services data.

CNBC.com Treasury Secretary Timothy Geithner

The results of stress tests of 19 leading U.S. banks due later on Thursday are expected to show more than half in need of dozens of billions of dollars in extra capital.

But bank shares soared on Wall Street and the momentum carried over to Asian trade as investors welcomed more clarity on the health of the sector at the heart of a financial crisis that drove the world economy into its worst recession in six decades.

Markets also found comfort in news of slowing U.S. job losses and an improving outlook for Europe's dominant service sector and hope to hear a similarly assuring message from the European Central Bank when it meets later on Thursday.

• Dr. Doom: Stress Tests 'Aren't Stressful Enough'

The ECB is seen nearly certain to shave another quarter point off its benchmark rate to a new record low of 1.0 percent and the market focus now is on whether it will announce any unconventional steps to get the euro zone economy back on its feet.

Geithner, speaking ahead of the release of the results of bank stress tests, assured the U.S. public that the vast majority of the screened banks would be able to raise capital on their own and none faced a threat of collapse.

"None of those 19 banks are at risk for insolvency," he said, according to a transcript of a television interview.

Tepid Recovery

Geithner also said the pace of the U.S. economic decline was slowing, even as the economy still faced enormous uncertainty.

"The pace of decline is slowing, here and around the world. And there are some places where we're seeing things starting to improve, but the main thing is a sense of stability," he said.

The world's biggest economy is now forecast to start recovering from its worst recession in a generation in the second half of the year, though San Francisco Fed president Janet Yellen warned the recovery may be "frustratingly tepid."

Stocks, commodities, emerging market debt and high-yielding currencies have all rallied in recent weeks on hopes that the global economic slump might be reaching a bottom.

There is still plenty of evidence of deep economic pain caused by the crisis sparked by reckless bets on the U.S. housing market, but investors have been increasingly shrugging off bad news and focusing instead on signs that things were looking up.

An Australian jobs report provided the latest of such promising signals, showing the economy created more than 27,000 new jobs last month rather than shedding 25,000 as markets had expected.

The report, which pushed the Australian dollar to a seven-month high, followed Wednesday's U.S. private sector jobs data that showed job losses slowed more than expected, boding well for the broader U.S. payrolls report on Friday.

Unconventional Steps

In Europe, the Markit index of euro zone services business activity still showed a contraction, but it recorded its biggest one-month increase since December 2001 and companies were even more optimistic about the future.

Still, European Commission forecasts that the euro area economy will shrink both this year and next kept speculation alive that the ECB will announce some unconventional steps this week, even though policymakers appear to be split on what to do.

Asian stock markets climbed to a seven-month high on Thursday, matching Wall Street gains overnight, relieved that the nail-biting uncertainty about the state of U.S. banks will soon be over. Tokyo led with nearly a 4 percent gain to a six-month high, catching up after a three-day holiday and with markets elsewhere in Asia-Pacific also trading higher.

"It's become highly unlikely there will be more failures like Lehman Brothers," said Fumiyuki Nakanishi, manager at SMBC Friend Securities in Japan. "The market now holds the view that the worst may be over, at least for America. A very strong bull market appears to have begun."

Regulators have told Bank of America it needs $34 billion of capital, while Citigroup needs $5 billion and the auto and mortgage lender GMAC needs $11.5 billion, according to people familiar with the matter.

The Wall Street Journal reported that Wells Fargo needed $15 billion and Morgan Stanley $1.5 billion.

The reported capital shortfalls so far are much larger than analysts had expected but investors found reassurance in the fact a number of major institutions seemed to have sufficient capital cushions and the worst cases still looked manageable.

• Slideshow: What Does $1 Trillion Look Like?

"The market likes the certainty of putting numbers on the worst-case scenarios of how much capital these banks need," said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California.

Copyright 2009 Reuters. Click for restrictions.