'Stress Test' Preview: U.S. Bank Problem List

Federal regulators by the end of April will complete "stress tests" to determine the financial health of the top 19 major U.S. banking organizations with more than $100 billion in assets. While we can't replicate the government's tests with available data, we can get a pretty good idea of which banks will be scrutinized and what the results will look like.

The stress tests are "forward-looking capital assessments" meant to determine whether any of the large bank holding companies need "an additional capital buffer during this period of heightened uncertainty," according to the Treasury's White Paper on the Capital Assistance Program. Regulators will conduct two tests: One using assumptions for gross domestic product growth and unemployment expected by most economists; and another using a "more adverse scenario," reflecting a deeper recession than what is currently forecast.

Holding companies found to be in need of additional capital will have six months to either raise some or all of the capital privately, or apply to immediately raise some or all of the needed capital from the treasury, through the CAP.

In the below list, we have emphasized the ratio of nonperforming loans and debt securities to tier-1 capital and loan loss reserves. This is also known as the "Texas Ratio."

While so many recent discussions have focused on tangible common equity ratios, the fact is that preferred equity capital is still capital. Tier-1 capital is total equity capital less some goodwill, other intangible assets and, in some cases, non-qualifying preferred stock.

While we can't replicate the stress tests that bank regulators and holding companies will be running, the Texas Ratio at least shows which of the largest holding companies have the most exposure of tier-1 capital and loan loss reserves to problem assets. A level over 20% is typically considered excessive.

Here's a list of all U.S. holding companies with total assets greater than $50 billion that filed Consolidate Financial Statements for Holding Companies (FR Y-9C) with the Board of Governors of the Federal Reserve System, for Dec. 31. For holding companies controlled by foreign companies, the top holding company is also listed:

Largest Holding Companies with Federal Reserve Y-9C Filings Dec. 31, 2008 ($Bil)

It's important to point out that the figures for Bank of America (BAC Quote) don't include the additional $10 billion in additional capital the company received via the Treasury's Troubled Asset Relief Program, or TARP, on Jan. 9, following the year-end acquisition of Merrill Lynch. On Jan. 16, the Treasury announced it would provide an additional $20 billion in new capital to Bank of America. Since neither the assets acquired from Merrill nor the $30 billion in new capital were included in the company's Dec. 31 filings, Bank of America may appear in stronger shape when first quarter 2009 numbers are available