Deciphering the Bank Stress Tests

Here are a couple highlights for a recent post over at Daily Reckoning regarding the bank stress test results.

  • Banks need about $75 billion to reach “adequate capitalization”
  • “Adequate capitalization” is when common equity equals 4%
  • Common equity being at 4% means a debt-to-equity ratio of 25-to-1
  • The current bank needs do not factor in the potential for bank assets to lose their value
  • The current bank needs are based on a rosy worst case scenario of a 3.3% drop in GDP this year and unemployment of 8.9%
  • The government’s latest understated unemployment data is already reporting unemployment at 8.9%, so the government is trying to convince us that the worst case scenario is unemployment stays the same

Additionally, here are what some of the larger banks needed according to the stress tests:

  • Citigroup $5.5 billion
  • Wells Fargo $15 billion
  • Bank of America $34 billion

Keep in mind that these are the amounts of money that must be given to the banks now in order for the banks to get themselves UP to a 25-to-1 leverage ratio. Also, while Citigroup appears to be less incompetent than Wells and B of A, a recent article in Time magazine says that Citi “got credit for a capital conversion it has yet to complete. Strip that out, and the amount of capital Citi needs balloons to nearly $63 billion, more than any of the other banks tested.”

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