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Banks aren’t just stressed, they’re angry

Yesterday was the day that the US Government was meant to come out and say that their banks were really stressed, but they didn’t.

There’s lot of negotiation of the detail you see. You only have to checkout the things worth reading section of this blog to see the history, although here’s a few of the more choice headlines:

US banks in talks over capital buffers (Times)
Wall Street awaits results of US bank 'stress tests' (Guardian)
Stress test looms for Buffett's Obama support (Independent)
Tug-of-war over stress tests shows banks have become too powerful (Telegraph)
Buffett Dismisses Government Stress Tests, Praises Wells Fargo (Bloomberg)

Citigroup and Bank of America 'must raise billions in extra capital' (Guardian)

BofA says no plan to raise capital, Citi mum (Reuters)
New BofA chairman must prove independence (Reuters)
US banking chairman is voted out (BBC)
Governance and BofA (Financial Times)
Bank of America’s shareholders get tough—sort of (Economist) 

Report: Citigroup may need $10B in extra capital (Phillyburbs)
Citi acts on stress tests (Telegraph)
Citi to sell Nikko to SMFG for $7.8bn (Financial Times)
Citigroup scrambles to raise capital (Financial Times)
Any Citi capital need seen as manageable-sources (Reuters)
More bonuses for Citigroup's bankers? Yes (MSN)

U.S. Bank Stress Test Results Delayed as Conclusions Debated (Bloomberg) 

What this tells me is that Citi and Bank of America are deficient and possibly other banks too.

It also tells me that, reading through the detail, the whole stress test process has difficult and not necessarily worth it.

The tests were announced in February and are based upon 150 economists, policymakers and regulators scrutinising the balance sheets of the nineteen largest US banks – those with assets over $100 billion – and asking: “are these banks sound or screwed?”

To answer the question, the 150 economists, policymakers and regulators looked at all their forecasts and asked: “how bad is the next 18 months?”

Based upon a consensus of all these forecasts, the economists, policymakers and regulators then said: “let’s take the worst case and see which banks are screwed”.

The fine details were then leaked to the Wall Street Journal, who said that Citi and Bank of America, and maybe Wells Fargo, Fifth-Third and Regions Financial would need to hike their capital to cover future stresses.

Oh dear.

Share prices drop like an anchor off a ship, Ken Lewis loses his role as Chairman of BoA and no-one is pandering to Pandit at Citi.

Then Barack Obama and his team see that they have a problem.

If they announce that five of their biggest banks are screwed, then any green shoots of confidence in the American economy goes belly up.

So the banks call in all the financial economists, policymakers and regulators along with the banks and start negotiating how bad 2010 really could be.

The banks tell the economists, policymakers and regulators that it can’t really be that bad.

So the economists, policymakers and regulators revise all their figures downwards and now only BoA and Citi look bad.

But that’s not good, so Ken Lewis and Vikram Pandit have a chat and realise that their balance sheets look worse than they are, so they make their balance sheets look better.


Worst case?

$10 billion shortfall for each of the biggest two banks in America.

Apparently, the WSJ is also aware of eight other banks who need to raise capital. 

The rest?

They're fine.

In other words, this process of number munching will make it all alright.

So, the stress test results are announced on Thursday and let’s see who’s right.

When the banks reach the end of 2010, let’s see who’s right.

And when Barack Obama announced in April that this would be a completely transparent process with accountability, let’s see who’s right.

As many of us are watching this space, and we’re watching it very, very closely!

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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