Stress Test Failures: Banks Announce Plans

Ten of the largest U.S. bank holding companies (BHCs) failed the stress test. They need to develop a detailed capital plan which requires approval by their primary supervisor, after consultation with the FDIC and Treasury. These BHCs have until June 8, 2009 to develop a plan to raise funding from private sources and until November 9, 2009 to implement the plan. While the corporate headquarters is noted, these BHCs have extensive operations throughout the United States. Bank of America, Citigroup, GMAC, Morgan Stanley and Wells Fargo are global financial services companies that also conduct business around the world. Click on the bank links to see their capital plans to meet the U.S. government’s stress test requirements.

Bank of America, Charlotte, NC: $33.9 billion. Kenneth D. Lewis, Chief Executive Officer and President said: “We are comfortable with our current capital position in the present economic environment.” Mr. Lewis continued, “We are working on a plan to submit to the government for such a contingency.” And, “While it would have a number of components, we will not need any new government money. The plan will be implemented by the Nov. 9 deadline.”

Citigroup, New York, NY: $5.5 billion. Vikram Pandit, Chief Executive Officer, stated that “the government’s stress test was a rigorous process that assessed our capital and confirms our view that Citi’s plans and actions will give it the financial strength to weather an adverse stress scenario.” Citi announced it will be “increasing the maximum amount of preferred securities and trust preferred securities that it will accept in exchange for common stock from $27.5 billion to $33 billion to further increase Tier I Common without any additional U.S. government investment or conversion of U.S. government securities into common shares.”

Fifth Third Bancorp, Cincinnati, OH: $1.1 billion. Kevin Kabat, President, Chairman and CEO of Fifth Third Bancorp, stated: “We have outlined and implemented a number of steps over the past year to strengthen our common equity position to prepare for potential economic deterioration. We expect to meet this new commitment to further reinforce our capital composition within six months through additional private market actions. We do not expect to further utilize government capital programs.”

GMAC, Detroit, MI: $11.5 billion. Alvaro G. de Molina, Chief Executive Officer, stated: “We support the government’s efforts to shore-up the banking system and expect that the additional capital raised will further strengthen GMAC and aid in achieving our strategic objectives.” GMAC announced that “the company will have increased the common shareholder equity component of Tier 1 capital by $11.5 billion, of which $9.1 billion must be new Tier 1 capital.”

KeyCorp, Cleveland, OH: $1.8 billion. Henry Meyer, Chairman and Chief Executive Officer, stated that “Key has a range of available alternatives to raise the common equity from non-governmental sources over the next six months. KeyCorp alternatives include “exchanges of common shares for outstanding preferred and trust preferred shares, issuing common shares, or other alternatives.”

Morgan Stanley, New York, NY: $1.8 billion. Morgan Stanley is planning a joint venture with Smith Barney. In anticipation of this, it announced that “Given the $2.7 billion impact on tangible common equity resulting from the closing of the Smith Barney joint venture an increase in capital is consistent with the Firm’s own long-term capital plan, and will be addressed by the $2 billion common stock offering announced today.”

PNC Financial Services, Pittsburgh, PA: $600 million. PNC announced that “it plans to satisfy the requirement to increase common shareholders’ equity by $600 million under the Supervisory Capital Assessment Program (SCAP). This will be accomplished “through a combination of growth in retained earnings and other capital market alternatives.” Furthermore, “PNC has no plans to convert preferred shares issued under the U.S. Treasury Department’s Capital Purchase Program.”

Regions Financial, Birmingham, AL: $2.5 billion. Regions announced that it “has committed to increase its common equity by $2.5 billion. This will strengthen Regions’ current Tier 1 Common to risk-weighted asset ratio, which was 6.49 percent at March 31, 2009, to a pro forma ratio of 8.7 percent or more than twice the required 4 percent level.”

SunTrust Banks, Atlanta, GA: $2.2 billion. James M. Wells III, Chairman and Chief Executive Officer, stated “We believe we already have the capital resources we need to withstand expected, and even more severe, economic pressures. Mr. Wells added “We will evaluate multiple alternatives in working with our regulators to determine how best to realign our capital and comply with this new regulatory requirement.” The Company said that “Alternatives include both internally and externally generated capital to increase the Tier 1 common capital level.”

Wells Fargo, San Francisco, CA: $13.7 billion. Wells Fargo completed its merger with Wachovia effective December 31, 2008. Howard Atkins, Chief Financial Officer, stated that “Wells Fargo would be well above the Tier 1 common equity target of 4% today if it had not written off almost $40 billion of troubled loans from Wachovia Corporation.” Mr. Atkins continued, “The main reason the Federal Reserve has required Wells Fargo to hold an extra $13.7 billion in Tier 1 common equity is based on what we believe is their excessively conservative estimate of pre-provision net revenue (PPNR) in the adverse scenario.” And, “we believe our Company’s earnings and other internally-generated capital will generate enough capital to meet the 4% test by November 9, 2009.”

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Stress Test Results

On May 7, 2009, the Board of Governors of the Federal Reserve System released the findings of their report on the Supervisory Capital Assessment Program (SCAP). Commonly referred to as the “stress test”, the report focused on 19 banks with $100 billion or more in assets. These large banks were examined to see if they had enough capital to tolerate a worsening in the economy.

The introduction to the SCAP report said, “A banking organization holds capital to guard against uncertainty.” Furthermore, “During this period of heightened economic uncertainty, U.S. federal banking supervisors believe that the largest U.S. bank holding companies (BHCs) should have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers in a more severe recession than is anticipated.”

Out of the 19 banks studied, nine passed the test and are well capitalized:

American Express

BB&T

Bank of New York Mellon

Capital One Financial

Goldman Sachs Group

JP Morgan Chase

MetLife

State Street

US Bancorp

The remaining 10 BHCs listed below failed the test. They need to develop a detailed capital plan which requires approval by their primary supervisor, after consultation with the FDIC and Treasury. These BHCs have (30) days to develop a plan to raise funding from private sources and until November 9, 2009 to implement the plan. This list shows how much capital these BHCs need to raise:

Bank of America	$33.9 billion
Citigroup	$5.5 billion
Fifth Third Bancorp	$1.1 billion
GMAC	$11.5 billion
KeyCorp	$1.8 billion
Morgan Stanley	$1.8 billion
PNC Financial Services	$600 million
Regions Financial	$2.5 billion
SunTrust Banks	$2.2 billion
Wells Fargo	$13.7 billion

As a group, these 19 banks hold an estimated two-thirds of the assets in the U.S. banking system. Most Americans bank or have credit cards with one or more of these institutions.

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