US Releases Capital Guidelines For Banks Under Stress Test

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US Releases Capital Guidelines For Banks Under Stress Test
By: CNBC.com With Reuters | 06 May 2009 | 05:58 PM ET

US regulators released capital guidelines for the nation's 19 largest financial insitutions under the government's stress test and said banks needing fresh capital will have until June 8 to develop a plan and Nov. 9 to raise the capital.

The eagerly awaited results, which will be released at 5 pm New York time on Thursday, will lay out how much more capital some banks may need to raise to satisfy new stringent capital cushion targets, the US Treasury and bank regulators said in a joint statement late Wednesday.

Banks must ensure that they have tier one risk-based capital ratios of 6.0 percent, and tier one common risk-based capital ratios of 4.0 percent at the end of 2010, under a hypothetical sharper than expected economic downturn, the statement said.

Regulators described the capital as a 'one-time buffer' that will give market participants confidence in the ability of the top banks to continue providing credit to U.S. households and businesses, even if the economy is weaker than expected.

Regulators also said the banks must review their existing management to "assure that the leadership of the firms has sufficient expertise and ability" to manage risk.

Banks seeking to repay U.S. taxpayer bailout funds will have to prove they can maintain the higher capital buffers and can issue debt not backed by government guarantees.

"The U.S. government reaffirms its commitment to stand firmly behind the banking system during this period of financial strain to ensure it can perform its key function of providing credit to households and businesses," the statement said.

The release of the capital guidelines follows a steady stream of leaks to the news media concerning how individual banks may have fared on the tests.

Bank of America [BAC  12.69 ▲  1.85  (+17.07%) ] needs to close a nearly $35 billion capital gap. Wells Fargo [WFC  26.84  ▲ 3.57  (+15.34%) ] needs $15 billion, while Citigroup [C  3.86 ▲ 0.55  (+16.62%) ] probably will require about $5 billion.

Among the banks that will need no additional capital are:

JPMorgan Chase [JPM  37.22  ▲  2.40  (+6.89%) ], Goldman Sachs [GS  139.498  ▲  4.298  (+3.18%) ], American Express [AXP  27.14  ▲  0.57  (+2.15%) ], Regions Financial [RF  5.83 ▲  0.34  (+6.19%) ] and Bank of New York Mellon [BK  30.46  ▲ 3.05  (+11.13%)  ].

Shares of bank stocks soared Wednesday even as the government told some of the industry's leaders that they'll need to raise billions.