The Stress Tests for the US Bank Holding Companies (BHC) have been released by the Fed. As had been leaked, the industry must raise $74.6 billion. The biggest number is for the Bank of America, which must raise $33.9 million, as they are unlikely to convert the preferred shares owned by the Treasury. The New York Times is reporting that the US Government will end up owning 36 pct of Citi after they convert their rescue funds into common stock. They will still have to raise $5.5 billion. Other interesting details:
Residential and consumer loans account for 70% of the losses projected under the adverse scenario, which would amount to $599.2 billion. The adverse scenario has unemployment at 8.9% in 2009 and topping out at 10.3% in 2010. Assuming that residential and consumer loans losses are a function of the unemployment rate, a lot is riding on what some economists think is an optimistic number. According to the Bureau of Labor Statistics, we’re already at 8.5% as of March (April’s numbers are being released tomorrow at 8:30 am). These results also suggest that commercial lending comprises a much smaller portion of the overall losses and won’t be the "next shoe to drop" for the economy as many people have suggested.
In the adverse scenario, each BHC was given a range of loss percent for the various categories. Each BHC could use firm-specific data to come up with their own assessment of the loss rate. Interestingly, for the First Lien Mortgages Bank of America came up with 6.8% while JP Morgan Chase 10.2%–a differential that seems quite high. Of course, JPMC bought WaMu, which had a large market share on the west coast. Another west coast bank, Wells, used 11.8% as their loss rate.
The Fed refers to the SCAP buffer–the capital needed to be raised under the Supervisory Capital Assessment Program, as a way for market participants, as well as the firms themselves, to have "confidence in the capacity of the major BHCs to perform their vital role in lending even if the economy proves weaker than expected." The press surrounding this announcement suggests that certainly the former will benefit from these results. What’s less clear is whether the banks themselves will magically start lending again. And, as discussed here, in this dynamic market, how will business models evolve to account for emerging opportunities and risks?