Monday, May 18, 2009

Smaller US banks need additional $24bn

Posted in the Financial Times by Saskia Scholtes, Julie MacIntosh and Francesco Guerrera:

Small and medium-sized US banks must raise some $24bn to meet the capital standards set by the government in its stress tests of large institutions, research for the Financial Times shows.

News of the potential capital shortfall could increase pressure on many of the 7,900 US banks that form the backbone of the US financial system.

As many as 500 more banks could close, according to investment bank Sandler O’Neill, which carried out the research.

Since this month’s release of the tests for the 19 largest banks, regulators and investors have increased their focus on the next tier of lenders, amid concerns some of them might struggle to survive if the economy worsens.

The government’s stress-case would result in capital shortfalls for 38 per cent of the 200 banks below the 19 largest financial institutions, leading to a deficit of around $16.2bn in common equity, according to Sandler O’Neill.

Applying similar criteria to the remaining 7,700 banks in the US would result in a further $7.8bn capital deficit.

The banks have to repay a combined $27bn in aid from the Troubled Asset Relief Programme (Tarp) but they could do that from internal resources rather than raising more funds.

The US Treasury has said that it does not intend to extend the stress tests beyond the 19 top institutions it examined. But analysts say that the public release of the government’s test methodology and capital adequacy philosophy means that the tests’ standards will become a model for the rest of the US banking system. “This will ultimately migrate down the banking industry no matter what Treasury says,” said Robert Albertson, chief strategist at Sandler O’Neill. “It’s like telling bank examiners to close their eyes and not to think of a chicken.”

The government found 10 of the largest 19 US financial institutions in need of additional capital earlier this month, identifying a $74.6bn combined shortfall.

The application of the large bank stress tests could make some smaller banks vulnerable, say analysts. Some smaller banks may either struggle to raise capital or have less flexibility to do so. That, in turn, could lead to a flurry of takeovers.

“At some point there’s going to be massive consolidation,” said one industry banker. ”But for now, a lot of banks are going to raise as much capital as they can.”

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