10 U.S. banks to need more capital on stress test

About 10 of the 19 largest U.S. banks being stress tested will be instructed by regulators to raise more capital, according to a source familiar with official talks.

The banks have been negotiating with their regulators about the depth of their capital needs, should the recession prove to be deeper and longer than anticipated. Markets have been anxiously anticipating the results, which will differentiate the strongest banks from those still expected to sustain considerable credit losses.

The exact roster of banks needing to build their capital positions is still unclear. Banks are expected to be briefed on the official results on Tuesday. The Federal Reserve and Treasury Department will also tell them how policymakers plan to publicly unveil the market-sensitive results, the source said, speaking anonymously because the discussions are private.

The Treasury and Fed declined to comment on how many banks will be directed to raise more capital.

The largest U.S. banks have spent recent days making the case to regulators that they have the financial firepower to withstand a deeper recession, as Bank of America on Monday denied a report it was trying to raise capital of $10 billion.

Some industry insiders worry the stress test results come at a time when the sector is starting to see positive effects from some surprisingly strong first-quarter earnings figures.

"I think the great risk there is that you create some new uncertainty and concerns at the very time the financial condition of the banking industry is turning for the better," Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official said earlier on Monday.

Banks found to be in need of more capital will have to embark on a recovery plan that could involve converting preferred stock, raising fresh private capital, or accepting government help -- assistance which comes with close scrutiny from Congress that will certainly be unwelcome on Wall Street.

Banks found to need capital will likely want to lay out capital-raising plans quickly to avoid being punished by panicky investors, although regulators won't require them to put a plan on the table immediately.

The emphasis will be placed on raising capital from within or private outlets. Pouring more public money into banks would put political pressure on President Barack Obama, whose administration is keen to avoid asking lawmakers to approve more bailout money for shortfalls that some analysts think may reach $150 billion.

The Treasury could soon have more funds on hand to infuse into weaker institutions, as officials estimate that stronger banks will return at least $25 billion doled out from the government's financial rescue fund. However, they want to ensure enough capital remains in the system as a whole.

Policymakers are expected to soon lay out conditions banks would need to meet to return funds.

White House spokesman Robert Gibbs on Monday said that the administration does not see a need to ask the U.S. Congress for additional funds to support banks, and that the banks will be encouraged to seek extra funds through private sources.

"I think everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control," Gibbs said.

He also said that the banks themselves will determine which steps they will take to raise capital. "They'll have a certain amount of time to put together a plan that meets ... the test of regulators to ensure that stability," Gibbs told reporters.

Some banks have complained that regulators were too harsh in their assessment over how much of a buffer they need to absorb future losses, and were underestimating profitability.

"The banking system can handle an awful lot of loss and be okay," JPMorgan Chase & Co Chief Executive Jamie Dimon said on a conference call, adding that he agreed with legendary investor Warren Buffett who said many banks have enough earning power to make up for future losses.

NOT SO BAD?

Bank of America Corp shares rose more than 19 percent after it denied a Financial Times report that it was working on plans to raise fresh funds to fill a $10 billion capital hole.

The KBW Banks index, which includes about two dozen large banks including Bank of America, rose almost 15 percent.

But investors remained on edge as Thursday's deadline neared. The Associated Press reported that Wells Fargo was asked to raise more capital after its stress test.

Citigroup has also been identified as a bank needing to raise its capital buffer. The firm will need to boost its common equity by up to $10 billion, a person familiar with the matter said Monday.

Bank of America, Wells Fargo and JPMorgan did not immediately respond late on Monday to a request for comment. An official from Citigroup declined comment.

Ratings agency Standard & Poor's said it may lower the counterparty credit ratings of 22 financial firms -- including Bank of America, Wells Fargo and Citigroup -- based on results of its own stress testing.

"These rating actions identify companies that we believe have at least a one-in-two likelihood of a ... downgrade within 90 days," S&P said in a statement. "That said, we believe that most rated institutions will be able to earn their way out of these credit losses during the cycle."

As analysts crunched their own numbers, at least one found that balance sheets may not be in as bad shape as feared.

David Trone, a Fox-Pitt Kelton bank analyst, said he expected Thursday's results to show a few banks were in need of more capital, although the shortfalls would probably be modest and "bank stocks won't collapse."

The U.S. Federal Reserve and other regulators have spent the past few weeks poring over holdings of the 19 largest banks, examining real estate and other assets that have lost significant value as the housing market crashed.

The process aimed to gauge how banks would hold up if the economy were to continue its steep descent and home prices fell another 22 percent this year and 7 percent in 2010.

The institutions undergoing stress tests include Citigroup Inc, Bank of America, Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley, MetLife Inc, Wells Fargo & Co, PNC Financial Services Group Inc, US Bancorp, Bank of NY Mellon Corp, SunTrust Banks Inc, State Street Corp, Capital One Financial Corp, BB&T Corp, Regions Financial Corp, American Express Co, Fifth Third Bancorp, KeyCorp and GMAC LLC.

FACTBOX: Banks, trade groups meeting with Obama on Friday

The following is a list of banks and trade groups that have been invited to meet with U.S. President Barack Obama on Friday, according to a source familiar with preparations:
Fannie Mae and Freddie Mac - Seized by regulators when the cost of failing home loans pushed the mortgage-finance companies toward insolvency. Since being nationalized in September, the companies have been turned into tools to aid the housing market.
JPMorgan Chase - One of three national lenders that hold a large share of consumer deposits and received a $25 billion injection of capital from the Treasury Department in October. Last year, regulators helped JPMorgan buy Bear Stearns and Washington Mutual before they collapsed under the weight of bad housing bets.
Citigroup - One of three national lenders that hold a large share of consumer deposits and received a $25 billion injection of capital from the Treasury Department in October. Since that initial investment, Treasury has pumped another $20 billion into the company, promised to shoulder losses on bad investments and otherwise helped prop-up the global lender.
Wells Fargo - One of three national lenders that hold a large share of consumer deposits and received a $25 billion injection of capital from the Treasury Department in October. That same month, the bank with a strong presence on the West Coast bought North Carolina-based Wachovia before that lender collapsed under the weight of mortgage losses.
Bank of America - The bank received a $15 billion injection of capital in October along with many large financial services companies. In early January, the Treasury Department pumped $20 billion more into the lender and agreed to shoulder some losses in order to preserve its buyout of Merrill Lynch.
Bank of New York/Mellon - In October, the Treasury bought a $3 billion stake in the financial services firm under its Troubled Asset Relief Program meant to buttress banks' balance sheets. The government's investment was one of the smallest under that first phase of the aid program.
State Street - The Treasury bought a $2 billion stake in the Boston-based financial services company in October -- its smallest investment under the initial phase of the TARP. The other eight firms that received an initial capital injection absorbed $123 billion in federal money.
Merrill Lynch - The investment bank received a $15 billion boost from the Treasury Department in October in order to preserve its buyout by Bank of America. Deep losses at the company have continued to weigh on Bank of America's balance sheet.
Goldman Sachs - The investment bank took a $10 billion investment from the Treasury Department in October but has since said it wants to return that government money. Now operating as a traditional bank accepting deposits.
Morgan Stanley - The investment bank received a $10 billion investment from the Treasury Department in October and soon thereafter applied to accept consumer deposits to help stabilize its balance sheet.
PNC Financial Services, USBancorp and Northern Trust - The three financial services companies have accepted $7.7 billion, $6.6 billion and $1.6 billion, respectively, under the TARP program. All three have said that they want to return the money soon. PNC and USBancorp are large, regional lenders.
American Bankers Association and Financial Services Roundtable - Two Washington-based trade groups that represent many of the large lenders and finance companies that have received billions of dollars in federal aid.