WASHINGTON (AP) – Citigroup Inc. and Bank of America Corp. will need to raise more capital if they can’t convince regulators that “stress test” results were mistaken, according to two people familiar with the matter.The banks are hard at work preparing their appeals, said the people, who spoke on condition of anonymity because everyone involved in the process has been ordered not to discuss it. Objections could include suggestions that regulators don’t fully understand the companies’ operations, they said.
But the companies face an uphill battle in convincing officials the results are mistaken because the tests can’t look too easy, analysts said.
Shares of Bank of America and Citi each dropped about 5 percent in afternoon trading. Wells Fargo & Co., PNC Financial Services Group Inc. and others also dipped. JPMorgan Chase & Co., American Express Co. and a few more of the 19 banks tested by the government traded slightly higher.
Investors have grown more concerned about regional banks with many risky loans on their books. Defaults on those loans could skyrocket in a worsening economy. Banks that carry such loans, including KeyCorp and SunTrust Banks Inc., are likely to be asked to improve their capital reserves.
“It’s not surprising there are some slaps on the wrist or calls for recapitalization,” for example at Citi or Bank of America, said Simon Johnson, a former IMF chief economist now at Massachusetts Institute of Technology’s Sloan School of Business. “It’s in keeping with their overall strategy” of waiting out the banking system’s problems, he said.
Federal Reserve officials told reporters Friday that all 19 banks that underwent stress tests will be required to keep an extra buffer of capital reserves beyond what is required now in case losses continue to mount. That would mean some banks will likely have to raise additional cash. But the Fed stressed in a statement that a bank’s need for more capital reserves to meet the requirements should not be considered a measure of the “current solvency or viability of the firm.”
Fed officials held top-secret meetings with bank executives last week to give them preliminary findings of how each bank would fare if the recession got much worse. The government plans to announce the results of the tests May 4, and banks will have the opportunity to appeal the findings.