The Federal Reserve released a statement regarding the “Supervisory Capital Assessment Program” on Monday. For those with short memories, SCAP is Fed-speak for “stress tests on 19 major US banks”.
The results of the SCAP, released in May, showed 10 of the 19 firms tested needed to add an aggregate $75bn to their capital buffers. Those banks that were determined to need more capital were given until June 8 to come up with a plan, and until November 9 to implement said plan.
Cue this statement from the Fed:
9 of the 10 Bank Holding Companies (BHCs) that were determined in the Supervisory Capital Assessment Program (SCAP) earlier this year to need to raise capital or improve the quality of their capital to withstand a worse-than-expected economic scenario now have increased their capital sufficiently to meet or exceed their required capital buffers.
The exception — surprise, surprise — is GMAC. According to the Fed statement,
GMAC is expected to meet its remaining buffer need by accessing the TARP Automotive Industry Financing Program, and is in discussions with the U.S. Treasury on the structure of its investment.
As for the requisite’ capital raising plans, the Fed said the banks took the following actions:
* New issuance of common equity or other eligible securities of $39 billion;
* Conversion of existing preferred equity to common equity in the amount of $23 billion;
* Sales of businesses or portfolios of assets that increased common equity by $9 billion.
Some firms also increased capital through other actions, including reduced dividend payments, issuance of common shares to employee stock ownership plans, and larger-than-anticipated pre-provision net revenue, to meet their required buffers. As a result of all these actions, Tier 1 Common equity increased by more than $77 billion at the 10 firms. The Fed did not comment on the fact that US unemployment is a whisker away from overtaking the “more adverse” economic scenario of 10.3 per cent, which wasn’t projected to hit until the third quarter 2010.
In effect, the banks have completed their capital raising for a scenario that has arrived one year early. Does that mean we should expect a fresh round of capital raising in 2010, if and when an “even more adverse” economic reality hits?
We defer, on that, to the wisdom of BNP Paribas:
…the underperformance of US bank stocks over recent weeks is a leading sign that they will come under capital pressures sooner rather than later.
Related links:
Stress tests show $75bn buffer needed – FT
Stress test capital shortfall could have been $68bn bigger – FT Alphaville
Stressing the stress tests – FT Alphaville