Bank Stress Test Results

Results from the government’s recent “bank stress test” are in, and the outlook is mixed.

Government regulators have told Bank of America that it must take serious steps to address an apparent $34 billion shortfall of funds, the biggest gap among the nation’s 19 biggest financial institutions.

Wells Fargo needs to find between $13 and $15 billion to make up their shortfall, while competitiors like GMAC, Citigroup, and Morgan Stanley need to raise between $1 billion and $11.5 billion.

We need to bear in mind that not all the results have been released. Results for 6 of the smaller financial institutions have yet to be reported.

Financial markets worldwide apparently shrugged off the news. Stocks of those banks that have a great need actually rose dramatically and the Dow Jones Industrial Average rose 101.63 points by 4 p.m. in yesterday’s trading. The Dow Jones average closed at 8512.28, which is a four-month high. In Tokyo Thursday morning, stocks were up 4.2%, suggesting that the worldwide reaction will be mild, if not slightly positive.

Some financial gurus have said the news was less negative than initially feared. Still others held onto the notion that banks in danger would be able to boost their funds without having to seek more government assistance. The stress tests were designed to look into the individual banks abilities to withstand a negative economic future. These tests were designed to alleviate the panic that investors felt earlier this year, as many people worried that banks might have to be nationalized to stay afloat.

Still unclear is what will happen to smaller regional banks that are expected to have a hard time coming up with the extra capital the government is telling them they need. Many of these banks are facing a pileup of bad loans that went to finance local residential and commercial property construction.

Final results of the government’s tests were released Thursday after the close of trading and are expected to include detailed information about the banking industry’s chance for health in a shaky economy.

The moves to disclose the results of the stress test mark the beginning of a new phase in the banking sector and in the administration of new president Barack Obama.

One reason that financial bigwigs and investors were scared away from large banks earlier this year was a large degree of uncertainty about these institutions solvency, a problem that the stress tests were designed to clear up. The question now? Can the stronger banks stand on their own feet, and how well will the weaker banks recover in a still struggling economy.

But will the public think that these bank stress tests were, frankly, “tough enough”? From the very beginning of this testing process, many economists and banking industry analysts argued that the worst-case economic scenario presented by the government was too positive. They argued that the actual consequences of the current situation were much worse than the banks were subjected to.

Any bank needing to raise more capital has only until June 8 to develop a plan, and only until the following November to implement that plan. The banks will also be forced to review their management team and assure federal banking regulators that their leadership has “sufficient expertise and ability,” to stay solvent through the current economic environment.