Capital-Short Banks Get Month to Offer Plan

Bank holding companies that government stress tests determine need more capital will have one month from Thursday to develop a plan, federal regulators said in a joint statement late Wednesday.
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Bank holding companies that government stress tests determine need more capital will have one month from Thursday to develop a plan and four months to implement it, federal regulators said in a joint statement late Wednesday.

The

Federal Reserve

is expected to report results of the government stress tests on the nation's 19 largest banks at 5 p.m. on Thursday, the Fed, Treasury, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said in a joint statement. The tests will determine how much capital each company and the 19 institutions in aggregate need to withstand "losses and loss rates across select categories of loans" under hypothetical worsening conditions in the economy.

The companies determined to need capital will have until June 8 to develop a detailed capital plan and until Nov. 9 to implement the plan.

"A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery," the statement read. "The U.S. government reaffirms its commitment to stand firmly behind the banking system during this period of financial strain to ensure it can perform its key function of providing credit to households and businesses."

The Supervisory Capital Assessment Program will expect banks to have Tier 1 capital "well in excess of the 4%

regulatory minimum

, and also to have common equity as the dominant element of that Tier 1 capital."

The program will require the companies to accumulate a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 Common risk-based ratio, or tangible common equity ratio, of at least 4% by the end of 2010, under "a more adverse macroeconomic scenario than is currently anticipated."

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) - Get Report

to convert the preferred stakes into common shares.

A report on Wednesday said regulators were pushing

Bank of America

(BAC) - Get Report

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) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Morgan Stanley

(MS) - Get Report

,

MetLife

(MET) - Get Report

, Wells Fargo,

PNC Financial Services

(PNC) - Get Report

,

US Bancorp

(USB) - Get Report

,

Bank of NY Mellon

(BK) - Get Report

,

SunTrust

(STI) - Get Report

,

State Street

(STT) - Get Report

,

Capital One Financial

(COF) - Get Report

,

BB&T

(BBT) - Get Report

,

Regions Financial

(RF) - Get Report

,

American Express

(AXP) - Get Report

,

Fifth Third

(FITB) - Get Report

,

KeyCorp

(KEY) - Get Report

and

General Motors'

(GM) - Get Report

GMAC.

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

Gannon joined TheStreet.com in March 2007, after spending more than six years as a reporter and editor for The Journal News in Westchester County, N.Y., most recently as an assistant metro editor. He earlier covered several political and government beats as a reporter, including the city of Yonkers. Earlier in his career, he covered venture capital, private equity and the IPO market for Thomson Financial�s Venture Capital Journal and advertising for Sales-Fax, a small, independent trade weekly. He earned a B.A. in history from the College of the Holy Cross and an M.S. in journalism from Northwestern University�s Medill School.