So 19 Banks "Passed" Stress Tests, What About the Other 8,000?!

Monday, May 18, 2009 , , 0 Comments

Much ado about stress tests aside, though they should have gotten far less coverage in both the mainstream and alternative financial media than they did, the attention given to the 19 banks tested could easily distract from the larger problem. Even if the FDIC, Treasury, and Federal Reserve can work in concert with the SEC and FASB riding shotgun to fudge the financial system into perceived solvency, they cannot prop up 8,000 banks at once.

We know this, of course, but I don't imagine anyone from inside any of the above-named agencies will feel compelled to address this issue before it becomes troublesome. Identifying the issue would mean an admittance of failure on their part, and we know they hate to do that until after the failure is painfully obvious.

FT on the small to medium-sized US bank issue:

Small and medium-sized US banks must raise some $24bn to meet the capital standards set by the government in its stress tests of large institutions, research for the Financial Times shows.

News of the potential capital shortfall could increase pressure on many of the 7,900 US banks that form the backbone of the US financial system.

As many as 500 more banks could close, according to investment bank Sandler O’Neill, which carried out the research.

Since this month’s release of the tests for the 19 largest banks, regulators and investors have increased their focus on the next tier of lenders, amid concerns some of them might struggle to survive if the economy worsens.

The government’s stress-case would result in capital shortfalls for 38 per cent of the 200 banks below the 19 largest financial institutions, leading to a deficit of around $16.2bn in common equity, according to Sandler O’Neill.

I sincerely hope (without directly accusing anyone of a thing) that none of these banks will be sacrificed to keep any of the larger banks alive. Lehman, Bear, WaMu... sometimes it feels like an insatiable beast of broken banking sucking the blood from smaller institutions to feed its appetite. The strangest part, of course, is that it is not only allowed to do so by the United States federal government, it is actually funded by it. Does that make sense to you?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.