Today, the nation’s 19 largest banks will start learning “how they fared in important federal examinations — and which among them will need another bailout from the government or private investors.” The government doesn’t plan to publicly disclose the results of these “stress tests” until May 4.
According to testimony delivered by Treasury Secretary Timothy Geithner on Wednesday, “the vast majority” of banks are well-capitalized. However, the stress tests are going to reveal the plight of the largest banks — which hold most of the assets in the U.S. — and thus are the ones to be concerned with. And if some preliminary analyses are any indication, things don’t look good.
According to analysts at Keefe, Bruyette & Woods (KBW) — which conducted its own stress test on 17 of the 19 banks that the government is examining — the U.S. banking system “might need as much as an additional $1 trillion in capital.” And as Bloomberg found, “bad assets at the biggest lenders almost tripled on average in the past year”:
Pittsburgh-based PNC Financial Services Group Inc. saw nonperforming assets — those no longer accruing interest — jump more than fivefold in the first quarter from a year earlier. They more than quadrupled at U.S. Bancorp in Minneapolis. At 13 of the largest U.S. banks, bad assets increased 169 percent on average from a year ago.
As Kevin Drum wrote “if [the KBW] report is even roughly accurate, I really have no idea how Tim Geithner is going to tap dance his way around the N-word much longer”:
If KBW is right — and their estimate certainly seems to be in the right ballpark — and a substantial fraction of that capital turns out to be needed by half a dozen of the biggest banks, where is it going to come from? The Times report is very antiseptic, but it’s a fantasy to think that any bank “on the verge” will be able to raise private capital, and the Treasury’s TARP money is nearly exhausted. So then what?
Indeed, Bloomberg concluded that banks “may have a hard time persuading investors to give them cash” due to the number of bad assets they hold, while there is increasing concern that Geithner’s plan for removing the assets will unceremoniously flop.
House Financial Services Chair Barney Frank (D-MA) also announced yesterday that “he no longer plans to expedite a bill that would allow the government to place large financial companies into receivership.” So we’re essentially left in no man’s land, with a growing number of assets, limited tools with which to combat them, and no political will to nationalize and break apart the very worst firms.
Update:
Ryan Avent has more.