US tests 'to show bank deficits'

Treasury tests set to show major banks short of billions of dollars if economy drops.

    Bank of America is said to need $34bn
    under the test [EPA]

    Citigroup is said to need about $5bn, according to a government official, but earlier news reports had put the figure closer to $10bn, while Regions Financial and Morgan Stanley are also said to need extra capital.

    Citigroup, Bank of America and Wells Fargo have already received about $65bn in government bailout money.

    However Timothy Geithner, the US treasury secretary, said in a statement on Thursday that US banks would emerge stronger to help the ailing US economy rebound.

    "As part of this process, banks will continue to restructure, selling non-core businesses to raise capital ... Over time, our  financial system should emerge stronger and less prone to excess," he said.

    Geithner said banks would have "a range of options" to raise capital over six months and that any bank unable to accomplish this through share or asset sales or conversions could request funds from the treasury's "capital assistance programme."

    Stress tests are a regular part of banking, being used to assess how to limit organisations' risk.

    'Health checks'

    Jan Randolph, a financial analyst, told Al Jazeera on Thursday the checks were important as uncertainty remained about how healthy banks are and whether they are hiding things in their books.

    "In advanced economies so much economic activity - employment, income, output, jobs, businesses - depends on credit"

    Jan Randolph,
    financial analyst

    "But the key test was how much capital do they have - because capital is so important for a bank. It is the shock absorber they have to have against losses."

    Randolph said that banks usually need about six per cent of their reliable capital as a percentage of its loan book to appear financially secure.

    "Some of these banks under this test have fallen below that and that is why they are trying to sort out those banks that need more capital.

    "The test is giving time to those banks not deemed to have enough capital to raise it."

    Essential to economy

    Banks can raise cash by either converting loans from the government or private sector into capital, selling assets, selling stocks, or asking the government for money.

    "It is absolutely essential to the economy. In advanced economies so much economic activity - employment, income, output, jobs, businesses - depends on credit," Randolph said.

    "But more importantly they can't grow unless there is new credit provided by the banking system.

    "At the moment we have got banking systems that are shrinking. They are not providing new credit."

    SOURCE: Al Jazeera and agencies


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