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We know many banks are stressed. Tomorrow, we'll get one judgment on just how much. After spending the past couple of months doing stress tests on America's 19 biggest banks, federal regulators are ready to reveal the results. For weeks, there's been speculation on how many of those banks might fall short and on how much capital they'll need to raise to guard against future losses.
NPR's John Ydstie has more on what's expected in tomorrow's report.
JOHN YDSTIE: The goal of the stress tests was to figure out how the 19 big banks would fare if the economy got even worse than it's currently forecast -home prices falling another 20 percent for instance, unemployment rising beyond 10 percent.
Eugene Ludwig has spent plenty of time examining banks, as controller of the currency from 1993 to '98, and more recently as a bank consultant. He says a significant number of the 19 banks will need to raise their cushion against losses.
Mr. EUGENE LUDWIG (CEO, Promontory Financial Group): There will be the need for capital in, I would say, more than half. But it will be more I think, for many of them, should be characterized as topping up.
YDSTIE: That would mean at least 10 banks that would be required by the government to boost their capital. But Ludwig says given that it's insurance against the possibility of an even worse economy, it's a positive outcome and should be comforting to the public. He does acknowledge that a couple of the banks could be forced to raise serious amount of capital. So what's the total amount of money that banks will have to raise? Douglas Elliot of the Brookings Institution thinks it will be in the $100 to $200 billion range.
Mr. DOUGLAS ELLIOT (Financial Expert, Brookings Institution): If it's lower than that, it'll be a real sign that the regulators think the situation's better than we do. On the other hand, if it's more than that, say $200 billion, we're in trouble.
YDSTIE: In trouble, says Elliot, a former investment banker at J.P. Morgan, because regulators would be admitting that the banks need a whole lot more money, even though it's clear Congress has no intention of providing it. That could be very unsettling for the financial markets. The International Monetary Fund believes the banks will need much more. It says that together they might need as much as $500 billion in additional reserves.
Yesterday in Capitol Hill, Federal Reserve chairman, Ben Bernanke, disagreed. He said U.S. banks have already taken significant write-downs and made reserves against losses. And he expressed confidence the banks could raise the needed capital in the private financial markets.
Mr. BEN BERNANKE (Chairman, Federal Reserve): I've looked at the many of the banks and I believe that many of them will be able to meet their capital needs without further government capital.
YDSTIE: That suggests some will need more government help. That could come from the $110 billion left in the treasury's TARP bailout fund. Doug Elliot says a number of banks might also choose to raise capital levels by taking the government up on its offer to convert the preferred shares the treasury initially purchased in banks into common stock.
Mr. ELLIOT: Essentially what we will be doing is we'll be swapping a kind of loan for actual ownership of a part of the banks. So, it increases the taxpayers' risk, but it also increases the potential return.
YDSTIE: Taxpayers could make big gains if shares in the bank, which have been very depressed, rise significantly. But if they fall, taxpayers lose. Former controller of the currency, Ludwig, says taxpayers have an even broader interest at stake.
Mr. LUDWIG: It is not - shouldn't be judged simply by what the taxpayer recoups in terms of that money, but it's what it does to the overall economy in terms of job creation, activity in the economy and ultimately tax recoup. And I think that's how it should be judged.
YDSTIE: For bank shareholders, raising capital can be painful, because initially, when new shares are created, the value of their holdings are diluted. That's why many banks have been arguing in private talks, they don't need as much new capital as the regulators say they do. By yesterday, though, the terms were set and the banks were told how much capital to raise. We'll all learn the results late Thursday afternoon when Treasury Secretary Geithner and Fed Chairman Bernanke reveal them in a news conference.
John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
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