They’re out! And available for download! And what do the long-awaited stress tests from America’s banking regulators tell us? Well, first of all, that American Express, BB&T, Bank of New York Mellon, Capital One, Goldman Sachs, JP Morgan Chase, MetLife, State Street and U.S. Bancorp all get to go about their business without having to raise new capital anytime soon. Also, at PNC, Morgan Stanley and Citigroup (!) the capital needs are small enough relative to assets that meeting regulators’ demands shouldn’t be much of a problem.
The big loser of the stress tests is GMAC, the General Motors financing arm that got itself converted into a bank holding company in December and faces, according to the stress test results, off-the-charts losses in second-lien mortgages and commercial real estate. GMAC, with assets of $172.7 billion, needs to raise $11.5 billion—and it’s awfully hard to see how it can do that without going hat in hand to taxpayers.
Bank of America ($33.9 billion) and Wells Fargo ($13.7) both require bigger infusions than GMAC, but both are also vastly bigger financial institutions and may be able to find ways to improve their capital ratios without accepting even bigger government say in their operations. Which leaves Regional banks Fifth Third ($1.1 billion), KeyCorp ($1.8 billion), Regions ($2.5 billion) and SunTrust ($2.2 billion). The total capital requirement for the 10 banks that face a shortfall is $75 billion.
What exactly do all these numbers mean? As I wrote in my previous post, not as much as you might think. In a world where the government has more or less guaranteed the liabilities of the biggest banks, banks don’t actually need any capital at all. The stress tests—and the attempts at raising capital that will follow—are about determining which banks are to become largely wards of the state (as Citi already is), and which deserve to escape from direct government control sooner rather than later. From the panicked, throw-money-at-them-all approach that prevailed last fall, we’re now moving to a more selective one that separates winners from losers. That is as it should be, and the oft-heard criticism that the stress tests made it too easy to be a winner—because the “adverse” economic scenario contemplated in the tests was far from a worst case—doesn’t take anything away from the fact that it’s useful to know the relative scores.
Update: Can’t get enough of the stress tests? Well here I am explaining the topic to the Canadian people, on the CBC’s As It Happens.