Stress Test Results Delayed

According to a report published this (Friday) morning in Bloomberg, the Federal Reserve is postponing the release of stress tests results. The results, originally scheduled for release on May 4, now may not be released until toward the end of next week, and a new release date is expected to be announced soon.

The regulators conducted the stress tests on 19 banks with assets exceeding $100 billion, including Bank of America Corp. (BAC), Citigroup Inc. (C), JP Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and PNC Financial Services (PNC).

The methodology of the tests was released on April 24, and on the same day the results were shared with the respective banks. The regulators and the banks’ managements are currently discussing the results. It appears that many banks have disputed the Regulator’s assessment of the projected losses, expected revenues (to cover those losses) and the resulting capital requirements, which may have caused the Fed to delay the realease.

There are reports that while some banks will be asked to raise capital, others will be asked to improve the quality of their capital by increasing the common equity. We think that it will not be easy for the banks to raise private capital in the current environment and as a result, they will either receive bailout money, or the government will convert its existing preferred capital into common equity.

The government now also appears to be open to the idea of converting the bank debt (bonds) into equity, though so far it had protected the bondholders.

As of now, we do not know how much disclosure will be made. Earlier, these were reports that only summary results will be released, but now it appears that we will see more details on individual banks’ capital assessments - though this has a potential of causing a sharp sell-off in the shares of weaker banks.

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