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US banks need to raise US$75bn

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The reports of the stress tests are finally out, and the FT is reporting that the banks have to raise $75bn:

US regulators on Thursday directed the nation’s largest banks to add $74.6bn in additional equity following a three-month stress test designed to measure their ability to withstand an economic downturn.

The results come after a week of leaks which braced markets for the news that billions of additional dollars would be needed to bolster US banks. The stress tests revealed that 10 of the 19 banks involved in the analysis carried out by government will need more common equity.

Some have been cheering the news as a early sign that the financial crisis is in its ‘last throes’.  See this for example:

Overall, however, federal officials and industry experts said the results of the stress tests were another sign that the economy was getting closer to the road to recovery.

“The results . . . should provide considerable comfort to investors and the public,” Federal Reserve Chairman Ben S. Bernanke said in releasing the data with Treasury Secretary Timothy F. Geithner.

Economist Sung Won Sohn summarized the stress-test results as “a sigh of relief.”

“The results are not as bad as feared,” said Sohn, a professor at Cal State Channel Islands and a former Wells Fargo executive. “The economic conditions are improving and the economic trough is not too far away.”

There are also some who would argue, as noted earlier that the tests themelves are flawed:

Critics of the stress tests have argued that the process is flawed and that banks that are said to require additional capital will be labelled as “failed” by the market and will find it difficult to raise new capital without government help. Others, such as Warren Buffett, have said that the tests apply a one-size-fits-all approach to banks with different portfolios and fails to account for their strengths.

Personally I take the view that reality is lot less sanguine than initial results would have you believe.  But given that the nature of this financial crisis is psychological (like most others) federal financial officials would have you believe that all is getting well in order to ignite a self-fulfilling prophecy.  Only time will tell who is right.

Update: HuffPo presents five reasons why the stress tests are unreliable.


Written by defennder

May 8, 2009 at 9:19 PM

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