US Bank Stress Test Results Due Tomorrow

Rumor and speculation remains the order of the day with tomorrow’s release of the long-awaited – and once-delayed – bank industry “stress tests”. These tests were ordered by the Obama administration to determine if the nation’s largest banks have sufficient capital to remain solvent based on a series of test scenarios created by the Treasury Department and Federal Reserve.

The tests were originally to be made public this past Monday but were delayed until tomorrow for reasons never really made clear. Naturally, this delay along with the initial controversy around the objectives of this testing process, gave rise to a few raised eyebrows and chatter refuses to subside suggesting that several of the banks included in the testing fell far short of the mandatory capital limits. The more conspiracy-minded amongst us might even suggest that the delay was necessary to provide bank executives more time to plead their case before the regulators.

There could be a hint of truth in this as a story in yesterday’s Wall Street Journal quoted anonymous sources “familiar with the matter” as saying that as many as ten of the nineteen banks failed to meet the minimum requirements and would need additional capital. Bank of America in particular seems to be on everyone’s list of troubled banks and a Bloomberg News release this morning even attached a shortfall figure of $35 billion as the amount the bank needs to raise.

Despite these persistent rumors, Wall Street’s new-found enthusiasm for bank stocks remains on the boil. The month of April has been very good for the financial sector – in the past month and a half, stock prices for Bank of America, Citigroup Inc., and Wells Fargo have tripled and even though all three have been “outed” as being in need of more money, their stock continues to climb. It will be interesting to see how tomorrow’s announcement – no matter which way it goes – will affect this resurgence in the financials.

One thing that is clear however, is that the government does not intend to serve as the initial lender to bring the capital levels to acceptable levels. In a news conference on Monday, White House spokesperson Robert Gibbs acknowledged that there would “undoubtedly” be banks that need more capital.

“I think everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control,” he added, serving notice that the banks need to find their own solutions to their capitalization problems.

Well, Gibbs’ comments may accurately reflect the government’s stance for now, but I can’t help but think that enticing new investment from private sources after the government has basically deemed you to be insolvent, could be quite a challenge. If public money is indeed off the table, we could see a further consolidation of the banks as the weaker ones sell-off assets or even put themselves into play for a takeover.

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