Regional Banks Under the Microscope

Regional banks could feel pressure to raise more capital as the results of the government stress tests are laid out to the nation's largest institutions this week.

Analysts digested what little detail came out of the Federal Reserve's white paper, published Friday, describing the stress test methodology used by the government in assessing the capital needs of banks in a worsening economy. The stress tests were performed on the 19 largest banks that have at least $100 billion in assets.

But Wall Street was disappointed that little detail and no actual results were released in the white paper. Regulators are reportedly to release results of the stress tests on May 4, though exactly how much detail will be made public at that time also is unknown.

Keefe, Bruyette & Woods estimates that the U.S. banking industry would need $1 trillion of capital in order to have a loan-loss reserve of at least 2% of loans, tangible common equity ratio in excess of 5% and well-capitalized other regulatory capital levels, according to a note published on Thursday.

Bank of America (BAC) and Wells Fargo (WFC) could "potentially face exchange offers in which preferred stockholders may be converted into common equity," according to a note by fixed-income analysts at CreditSights. "We also sense that some of the regional banks may need to consider exchange offers."

Regional banks generally "have higher loan exposures to categories such as commercial real estate. As well, they often have a smaller cushion in the lower-tier debt instruments," the analysts say. "So we cannot rule out that exchange offers along the lines of [Citigroup (C)] may be forthcoming from the regionals."