Maybe you short the banks going into this report?
U.S. Regulators Aim to Release Bank Stress-Test Results May 4
April 16 (Bloomberg) -- The Federal Reserve and other regulators aim to release the results of stress tests on the 19 biggest U.S. banks on May 4, a central bank official said.
The regulators also plan to publish a paper on their methods on April 24, in an effort to bolster credibility of the process, according to the official, who spoke on condition of anonymity. The results will include any plans for boosting capital to weather a deeper economic downturn, the person said.
“The more markers or sign posts you can put on the path, the more helpful it will be,” said R. Scott Siefers, managing director at Sandler O’Neill Partners L.P., a New York research firm specializing in bank stocks. “There are a lot of questions in investors’ minds.”
Procedures for releasing information on specific firms, which will expose weaker banks and boost confidence in stronger ones, are still under discussion. Bank regulators may also encourage each of the 19 firms to release an individual statement on the results of its own stress test, another person familiar with the matter said yesterday.
The Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., and Office of Thrift Supervision are using the tests to determine whether the top 19 banks have enough capital to cover loan losses during the next two years if the economy shrinks, unemployment surges and housing prices keep declining.
Fed Board Meets
The Fed, the nation’s primary regulator of bank holding companies, is leading the analysis on how much capital banks might need. Fed Chairman Ben S. Bernanke and the Fed Board met yesterday to discuss the government’s bank-support program.
While the tests are a central element of the administration’s financial-industry rescue, top U.S. Treasury officials aren’t participating in the reviews in order to maintain the independence of the regulators. The Treasury also won’t be a contributor to the white paper later this month.
The economy has worsened since the Treasury first announced the tests in February, raising questions about whether the baseline scenario regulators are applying to bank portfolios is rigorous enough.
The baseline forecast projected a 2 percent economic contraction and an 8.4 percent jobless rate in 2009, followed by 2.1 percent growth and 8.8 percent unemployment in 2010.
An “alternative more adverse” scenario had a 3.3 percent contraction in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth and 10.3 percent jobless in 2010.
‘Worst Case’
Economic output fell at a 5 percent annual pace in the first quarter, according to the median estimate in a Bloomberg News survey. The unemployment rate rose to 8.5 percent in March, a 25-year high, and the amount of industrial capacity in use fell to a record low of 69.3 percent.
“There is a sense that the worst case is becoming the base case,” said Siefers. “People are starting to view double-digit unemployment as a foregone conclusion.”
Still, there are early signs of a strengthening banking sector. Goldman Sachs Group Inc. said April 13 earnings for the first quarter were $1.81 billion, or $3.39 a share, after a surge in trading revenue. The results were better than analysts’ expectations of $1.64 and the New York-based firm sold $5 billion in stock to help repay government capital injections.
Wells Fargo & Co. said April 9 it would report net income of $3 billion, 50 percent more than the previous year’s period. The San Francisco-based bank said it closed $100 billion of mortgages in the quarter with an equal amount waiting to be finished, a signal that banking business is picking up.
Earnings Announcements
JPMorgan Chase & Co. today reported profit that beat analysts’ estimates, with first-quarter earnings dropping 10 percent to $2.14 billion. Citigroup Inc. is scheduled to report tomorrow. Bank of America Corp., Wells Fargo and Morgan Stanley are scheduled to announce results next week.
The tests are designed to mesh with the administration’s effort to remove distressed mortgage assets from banks’ balance sheets, which have hampered lending to consumers and businesses.
Officials aim to have the first purchases of the toxic assets by private investors financed by the government within weeks of the conclusion of the capital-need assessments.
The Treasury estimates it has about $135 billion left in the financial-rescue fund enacted in October.
In their assessments, regulators will look at off-balance- sheet commitments, earnings projections, risks of the banks’ business activities and the composition and quality of their capital, according to the Treasury.
The exams will help provide a ranking of the financial health of “one institution relative to another,” Frederic Mishkin, a Columbia University economist and former Fed governor, said in a Bloomberg television interview. “That can be very useful if government then decides it needs to take steps to deal with weak institutions.”
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net .
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