Posts Tagged ‘big banks’

The Fed Is Sending Big Banks Back to the Virtual Treadmill

Thursday, December 2nd, 2010

The Fed Is Sending Big Banks Back to the Virtual Treadmill

The Federal Reserve is going to subject the nation’s 19 largest banks to a new round of stress tests to determine if they are healthy enough to pay dividends to their shareholders again.   The Fed plans to use a conservative approach, applied with an even hand, on the nation’s largest and most complex banks.  The tests also will determine if the Fed needs to repurchase shares or take other actions to protect the banks’ cushions against possible future losses.

The planned tests are a lower profile version of the 2009 round, when regulators determined exactly how much capital big banks needed to survive worst-case economic conditions.  According to Fed officials, those stress tests were an excellent lesson about how to regulate banks in a way the mirrors events taking place in the broader economy.  The Fed plans to apply those lessons to the new stress tests.

“We anticipate that some firms with high capital levels that have been retaining solid earnings for several quarters will be interested in increasing or resuming dividends,” said Fed Governor Daniel Tarullo.  “We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain amply capitalized.”

Although the big banks appear to be significantly healthier than they were two years ago, several risks remain.  Other than the possibility of another economic downturn, banks face potential court challenges from investors who own mortgage-backed securities.  Some believe the banks should bear responsibility for loans that went south because they used improper procedures on these “put backs”.

Local Banks Facing Significant CRE Losses

Monday, June 15th, 2009

Toxic commercial real estate loans could create losses up to $100 billion for small and mid-size banks by the end of 2010 if the economy worsens.  According to a Wall Street Journal report – which applied the same criteria used by the federal government in its stress tests of 19 big banks — these institutions stand to lose up to $200 billion.  In that worst-case scenario, 600 small and mid-sized excedrin1banks could see their capital contract to levels that federal regulators consider troubling, possibly even surpassing revenues.  These losses would exceed home loan losses, which total approximately $49 billion.

The Journal, which based its analysis on data mined from banks’ filings with the Federal Reserve, are a grim reminder that the banking industry’s troubles are not confined to the 19 giants that have already completed the Treasury Department’s stress tests.  More than 8,000 lenders nationwide are feeling the dual impacts of the recession and commercial real estate slowdown.

The banks analyzed by the Journal include 940 bank-holding companies that filed financial statements with the Fed for the year ending December 31.  They range from large regional banks to mom-and-pop banks in small towns, as well as American-based subsidiaries of international banks.

Smaller banks are unlikely to appeal to bargain-hunting investors who are starting to recapitalize the industry’s giants.  As a result, these institutions must boost their capital by selling assets and making fewer loans – which could make the recession last even longer than anticipated.

Geithner: The Patient is Out of Intensive Care

Friday, May 15th, 2009

It’s been a long, strange ride, but the nation’s financial system is finally starting what is certain to be an extended healing process. Treasury Secretary Timothy Geithner believes that “the financial system is starting to heal” as he promised to move returned bail-out funds to community banks that need help.bandaid-on-broken-and-cracked-piggy-bank

Improved lending circumstances are tempering concerns about systemic risk and reduced leverage at banks, according to Geithner, who noted that “a substantial part of the adjustment process” for the financial sector is now coming to an end.

Several of the larger banks – Goldman Sachs, JP Morgan and Capital One Financial – want to repay the funds they received under the Troubled Asset Relief Program.  The Treasury will increase the money community banks can access to five percent of risk-weighted assets from three percent.  The government has already invested in preferred stock in 300 smaller banks.

“As in any financial crisis, the damage has been unfair and indiscriminate,” Geithner said.  “Ordinary Americans, small business owners and community banks who did the right thing and played by the rules are suffering from the actions of those who took on too much risk.”

Why the optimism?  Geithner points to declines in corporate bond spreads, lower risk premiums in inter-bank markets and cheaper default insurance on big banks as evidence that the financial system is healing.  “These are welcome signs, but the process of financial recovery and repair is going to take time,” he cautions.