US banks need $75bn in equity to survive

The release of the US government's stress test results revealed that 10 of the country's biggest 19 banks need nearly $75bn in reserves as a buffer against further economic deterioration.

Most at risk according to the tests is Bank of America, which needs another $33.9bn, but also in trouble are Wells Fargo, which is thought to need $13.7bn more in funds, GMAC, General Motors' financial unit, which requires $11.5bn and Citigroup and Morgan Stanley which need to raise $5.5bn and $1.8bn respectively.

Tim Geithner, US Treasury secretary, said: "These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario."

The government forecast that the combined losses of 19 of the country’s biggest lenders could be up to $599bn during the course of this year and next if the economy worsens, leading them to call for the extra capital. The results of the tests have been keenly awaited and have already led to a scramble for funds by the banks.

Some have already announced how they will raise new equity. BoA has said it will use asset sales among other measures, with Citi and Wells Fargo to issue shares or exchange preference shares.

Bulls viewed the findings as further evidence that the worst may be over for the industry, with many banks seeing their shares rise in after-market trading, but others said that the tests didn't differentiate enough between their business models.

Arch-bear Nouriel Roubini's opinion was that the tests were based on a situation no worse than the current one and so "will not be credibly interpreted as a sign of bank health".

WHAT THEY ARE SAYING
Lex, FT: "Finding that kind of money will be tricky considering the sum is almost three times total US equity capital raisings during the last half a year, according to Dealogic data. Nor will the process of 10 (or more) banks running to the market all at once be smooth: Morgan Stanley, which actually passed the test, and Wells Fargo are already out of the blocks. As forced sellers, institutional fund managers, for example, will be able to play banks off against each other. 'You're giving me a 7 per cent discount? The bank in here this morning offered 12 per cent.' The tests are over; not so the stresses."

David Enrich, Robin Sidel and Deborah Solomon, Wall Street Journal: "With the tests complete, Washington's effort to clean up the banking system now shifts into a new, potentially messy phase. While most of the banks that need capital are likely to be able to find it, analysts and bankers say a few others are likely to end up being largely owned by the U.S. government due to their inability to raise capital from private investors. Meanwhile, the tests don't address a sea of problems confronting many midsize and smaller banks." ·