American banks need to raise ‘billions’ more

Reports in the Wall Street Journal suggested that US regulators have told Bank of America and Citigroup that they may need considerably more capital to survive in their current form. The recommendations come as a result of the US government's 'stress tests' of the country's 19 biggest lenders and would amount to billions of dollars.

However the two banks are said to object to the findings and are expected to challenge them with detailed analysis showing that they do not need the funds. The government has already provided the two lenders with more than $90bn.

Markets in Asia reversed earlier gains after the news emerged as investors assumed that they would not be the only banks requiring further capital. The MSCI Asia Pacific Index lost 1.8 per cent in Tokyo, with HSBC Holdings falling two per cent and Australia's biggest lender, National Australia Bank cent, fell 3.7 per cent. After recent market rallies investors are jittery over the strength of the global financial system.

Chris Leung, a fund manager at Taifook Asset management in Hong Kong said: "You'd think that most banks could pass the stress tests, but if even these two fail, what it tells investors is that the situation could get much worse." Buyers headed for the safety of Government bonds in the wake of the story, with Treasuries climbing as a result.

Meanwhile Federal Deposit Insurance Chairman Sheila Blair said none of the top banks should be too big to fail and her organisation should have the power to close important financial firms. Lenders were told of the preliminary findings of the stress tests on April 24 and they will be released in their entirety on May 4.

WHAT THEY ARE SAYING
Richard Bove, of Rochdale Securities, on Bloomberg.com: "This test still strikes me as being unnecessary, dangerous, and poorly conceived. My fear is that this program will not only fail to raise more capital, but it will force banks to contract."

Dan Fitzpatrick, David Enrich & Damian Paletta, the Wall Street Journal: "One question is how the government is projecting banks' revenue streams through 2010. Some bankers are optimistic that the Fed will use their first-quarter numbers to predict their performance for the next two years. That could inflate the banks' earning potentials - and thus their capital cushions - because many of the companies had strong first-quarter performances. Analysts, investors and most executives say those results probably aren't sustainable."
 
Lex, FT: "Banks were already told their results last week. Those that have passed will certainly not fire anyone for leaking. Meanwhile, rumours of failures are flying around. This is no way to run a financial market. The Treasury should simply come clean now, forgetting next week's deadline." ·