WASHINGTON — The announcement next week of stress test results for the 19 largest banking companies is not likely to be as dramatic as many expect.
Though there are rumors to the contrary, roughly two-thirds of the companies effectively passed the test and will not require additional capital, according to sources. Among those that do need a bigger capital buffer, only a few will actually require more funds from the Treasury Department's Troubled Asset Relief Program.
The majority of the six or so that require capital improvement will convert their preferred government shares to common stock. Doing so would relieve them of the requirement to pay the government a 5% dividend on the preferred shares and boost their tangible common equity ratio, a critical measurement watched by analysts.
Only a very few companies would be required to do more, sources said. They would have at least six months to raise private capital; those that could not would receive government money. They may also be forced to engage in asset sales and take other measures.
Overall, the news is positive for regulators and the banking industry, though there are sure to be lingering doubts about the credibility of the stress tests.
It remains unclear exactly which companies require more dramatic assistance. Several, including Bank of America Corp. and Citigroup Inc., continue to discuss their results with regulators, arguing over the inputs and interpretations of the figures of the stress test.
Regulators are also altering results to reflect additional data from the first quarter; sources said the alterations could result in different outcomes for the institutions.
Bloomberg News reported Wednesday that, in addition to B of A and Citi, SunTrust Banks Inc., KeyCorp and Regions Financial Corp. will need an additional capital cushion.
Several analysts have said Fifth Third Bancorp is also likely to need more capital.
But sources told American Banker that most of these companies would be required only to convert their preferred government shares.
"That is the easiest and quickest route at this point," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. Inc.
Even though bankers were initially told they had until April 28 to dispute the results of the stress tests, that date has now slipped. Several independent sources described the process as "iterative," suggesting that discussions remain ongoing.
There is continuing speculation that another deadline could slip, but the results are still scheduled to be announced Monday.
If the preliminary results hold, they will be less dire than expected. By some estimates, the government had been expected to inject more than $200 billion of Tarp money into the 19 companies. That would have required seeking extra money from Congress — the program has just $134 billion of funds remaining.
But it now appears doubtful the Treasury will need most of the remaining funds to recapitalize the largest institutions.
"If, in fact, this is the ultimate outcome of the stress test, that would be good, because that would be mean the regulators feel like the banks can weather the worst outcome," said Mark Tenhundfeld, senior vice president of the American Bankers Association's Office of Regulatory Policy.
A lingering question is whether the stress tests themselves accomplished anything.
Critics have argued that by simply requiring bankers in need of additional capital to convert shares instead of raising new funds, regulators have not fundamentally improved the condition of the financial institutions.
But the conversion would save bankers the dividends they have been paying the government, and a higher TCE ratio would make their companies more stable.
Regulators announced plans to conduct the stress tests two months ago as part of a plan to assess capital positions at the biggest companies if economic conditions continue to deteriorate.
The tests relied on two scenarios, one a baseline scenario of expected conditions in the next two years, and the other a more adverse scenario.