Tense talks as U.S. bank stress tests near completion

The largest U.S. banks made the case to regulators on Monday that they have the financial firepower to withstand a deeper recession, as Bank of America denied a report it was trying to raise capital of $10 billion.

Banks and regulators were in tense discussions over the findings of so-called "stress tests" aimed at assessing whether the 19 largest firms have a sufficient capital cushion. Final results are expected to be disclosed on Thursday.

"Today is going to be a very key day in negotiations," a financial industry source said, speaking anonymously because the banks' discussions with regulators are not public. "Things are particularly tense."

U.S. officials are expected to brief banks on Tuesday on the results and on how they will be publicly unveiled.

A source familiar with the plans said the final results will come in a 150-page report on Thursday, and Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner will present the findings.

Banks found to be in need of more capital will have to embark on a recovery plan that could involve converting preferred stock, raising fresh private capital, or accepting government help -- assistance which comes with close scrutiny from Congress that will certainly be unwelcome on Wall Street.

Pouring more public money into banks would also put political pressure on President Barack Obama, whose administration is keen to avoid asking lawmakers to approve more bailout money for shortfalls that some analysts think may reach $150 billion.

White House spokesman Robert Gibbs on Monday said that the administration does not see a need to ask the U.S. Congress for additional funds to support banks, and that the banks will be encouraged to seek extra funds through private sources.

"I think everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control," Gibbs said.

He also said that the banks themselves will determine which steps they will take to raise capital. "They'll have a certain amount of time to put together a plan that meets ... the test of regulators to ensure that stability," Gibbs told reporters.

The source familiar with the stress test disclosure plan said the report would contain an outline of the recovery plans for banks found to need more capital.

Some banks have complained that regulators were too harsh in their assessment over how much of a buffer they need to absorb future losses, and were underestimating profitability.

"The banking system can handle an awful lot of loss and be okay," JPMorgan Chase & Co Chief Executive Jamie Dimon said on a conference call, adding that he agreed with legendary investor Warren Buffett who said many banks have enough earning power to make up for future losses.

Not so Bad?

Bank of America Corp shares rose more than 19 percent after it denied a Financial Times report that it was working on plans to raise fresh funds to fill a $10 billion capital hole.

The KBW Banks index, which includes about two dozen large banks including Bank of America, rose almost 15 percent.

But investors remained on edge as Thursday's deadline neared. The Associated Press reported that Wells Fargo was asked to raise more capital after its stress test.

Wells Fargo spokeswoman Julia Tunis Bernard declined to comment.

Citigroup has also been identified as a bank needing to raise its capital buffer. The firm will need to boost its common equity by up to $10 billion, a person familiar with the matter said Monday. Citigroup spokesman Steve Cohen declined to comment.

Ratings agency Standard & Poor's said it may lower the counterparty credit ratings of 22 financial firms -- including Bank of America, Wells Fargo and Citigroup -- based on results of its own stress testing.

"These rating actions identify companies that we believe have at least a one-in-two likelihood of a ... downgrade within 90 days," S&P said in a statement. "That said, we believe that most rated institutions will be able to earn their way out of these credit losses during the cycle."

As analysts crunched their own numbers, at least one found that balance sheets may not be in as bad shape as feared.

David Trone, a Fox-Pitt Kelton bank analyst, said he expected Thursday's results to show a few banks were in need of more capital, although the shortfalls would probably be modest and "bank stocks won't collapse." [ID:nN04393363]

The U.S. Federal Reserve and other regulators have spent the past few weeks poring over holdings of the 19 largest banks, examining real estate and other assets that have lost significant value as the housing market crashed.

The process aimed to gauge how banks would hold up if the economy were to continue its steep descent and home prices fell another 22 percent this year and 7 percent in 2010.

[Source: By Emily Kaiser and Karey Wutkowski, Reuters, Washington, 04May09]

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