From Bloomberg News;
Feb. 25 (Bloomberg) -- Regulators set a six-month deadline for the biggest 19 U.S. banks to raise any new capital deemed necessary after a review of their balance sheets. The regulators will complete their so-called stress tests by the end of next month, the Treasury said in a statement in Washington. Supervisors will determine what the appropriate capital buffer will be for each of the 19 firms after analyzing potential losses under two economic scenarios.
“While the vast majority of U.S. banking organizations have capital in excess of the amounts required to be considered well capitalized, the uncertain economic environment has eroded confidence in the amount and quality of capital held by some,” the Treasury said, announcing guidelines for new bank reviews.
Banks will have a choice of raising private capital or accepting taxpayer funds from the Treasury. Any new government money will come in the form of convertible preferred securities, which would acquire voting rights if converted into common stock. The Treasury said it would release guidelines on how it will handle those voting rights before completing any transactions. The shares would convert either at a bank’s request or at the end of a seven-year period.
Capital Assessments
In their assessments, regulators will incorporate off- balance sheet commitments, earnings projections, risks of the banks’ business activities and the composition and quality of their capital, the Treasury said. Losses will be projected under two economic scenarios. Under the “baseline” scenario, the U.S. economy will shrink 2 percent this year and expand 2.1 percent in 2010. The “alternative more adverse” set of projections has gross domestic product dropping by 3.3 percent this year, with a 0.5 percent expansion in 2010. Any capital investments made by the Treasury will be placed in a separate trust to manage the government’s investments in financial companies.
Hmmm, 3.3 percent decline in 2009 and a .5 percent expansion in 2010 is the adverse scenario? If you offered that to me as the worst case I would call you done in a New York minute! What truly amazes me is I was watching a few minutes of Bernanke's testimony today and a congressman actually asked a really good question.
"Mr. Chairman, if you say that you're not sure what the value of these troubled assets are now, how will you know what they are worth in your stress tests?"
Chairman Bernanke said something like...."Blah, blah, blah-blah...hummina hummina."
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