- The Washington Times - Tuesday, June 9, 2009

The Federal Reserve on Monday accepted plans from the 10 banks judged by regulators in stress tests last month to need additional capital to guard against a deeper economic downturn.

“The 10 banking organizations required by the Supervisory Capital Assessment Program to bolster their capital buffers have all submitted capital plans that, if implemented, would provide sufficient capital to meet the required buffer under the assessment’s more-adverse scenario,” the Fed said.

The 10 banks were told by regulators last month that they needed a combined capital buffer of $74.6 billion against the risk of a deeper recession and higher unemployment over the next two years. The Fed determined that nine other banks have enough capital to withstand a scenario of $600 billion in additional losses throughout the banking system.

“Supervisors also continue to work with all regulated financial institutions to review the quality of their corporate governance, risk management and capital planning processes,” the central bank said.

The Fed and the U.S. Treasury have poured hundreds of billions of dollars in short-term loans and taxpayer-funded capital into the banking system to restore confidence and restart the flow of credit. The stress tests published May 7 clarified the capital strength of some of the biggest banks, stimulating investor demand for debt and stock offerings.

“If you can encapsulate the capital needs of these banks and satisfy them, then it makes sense to begin to look across the valley toward what banks can earn several years out,” said R. Scott Siefers, managing director at Sandler O’Neill & Partners LP in New York.

The stress test “helped usher back in a time when banks can raise capital privately,” he said, adding that it may be years before some banks are strong enough to repay government stakes.

The Standard & Poor’s Financials Index has more than doubled from a low reached in March. Still, banks have tightened terms on credit because of rising economic risks. Unemployment rose to a 25-year high of 9.4 percent in May. Borrowing by U.S. consumers had the second-biggest drop on record in April, falling $15.7 billion, or at a 7.4 percent annual rate.

The 10 banks have already announced plans covering $70.6 billion of the capital buffer gap, according to calculations by Bloomberg News as of Friday. Banks had a deadline of Monday to submit plans and can implement the programs over the next five months.

The Fed is also recommending to the U.S. Treasury which of the nine banks with adequate capital should be allowed to repay government shares acquired under the Troubled Asset Relief Program. An announcement could come as soon as this week. The government has more than $200 billion in preferred stock investments in the 19 largest banks.

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