Capital-Short Banks Get Month to Offer Plan

Investors have increasingly looked at tangible common equity as a better measure of capital adequacy. But tangible common equity does not take into account the preferred equity stakes the government has invested in the banks through the Troubled Asset Relief Program. Therefore, the government has pushed troubled institutions like Citigroup (C) to convert the preferred stakes into common shares.

A report on Wednesday said regulators were pushing Bank of America (BAC) to do the same.

Treasury said it would consider requests to convert its preferred equity stakes in the banks to mandatory convertible preferred shares in an amount up to 2% of risk-weighted assets. The shares "can serve as a source of contingent common capital for the firm, convertible into common equity when and if needed to meet supervisory expectations regarding the amount and composition of capital."

Treasury said it expects any exchanges of its preferred stake into common stock should "be accompanied or preceded by new capital raises or exchanges of private capital securities into common equity."

Banks hoping to repay their TARP funds must, in addition to meeting the government's other capital requirements, demonstrate an ability to raise senior unsecured debt for a term longer than five years, not backed by FDIC guarantees, the statement said.

The institutions undergoing stress tests are Citigroup, Bank of America, Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), MetLife (MET), Wells Fargo, PNC Financial Services (PNC), US Bancorp (USB), Bank of NY Mellon (BK), SunTrust (STI), State Street (STT), Capital One Financial (COF), BB&T (BBT), Regions Financial (RF), American Express (AXP), Fifth Third (FITB), KeyCorp (KEY) and General Motors' (GM) GMAC.

The regulators said they do not intend to expand the stress tests beyond the 19 banks it evaluated in the first round.

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