US banks 'safe from insolvency'

[David Guyatt]

US banks 'safe from insolvency'

Not.

Love headlines? Enjoy larfing? Like to see how captions double-speak facts contained in the underlying article? Then read on:

http://news.bbc.co.uk/1/hi/business/8037258.stm

US banks 'safe from insolvency'

No US bank being screened by regulators is at risk of insolvency, US Treasury Secretary Timothy Geithner has said.



The results of "stress tests" on the financial health of 19 US banks are to be released after US financial markets close at 2200 BST.

The tests are expected to show that tens of billions of dollars are needed to bolster some banks' finances.

Citigroup and Bank of America are widely expected to need to raise the biggest amounts of cash.

Reports said that Citigroup may need more than $50bn, while Bank of America may need an extra $34bn.

“ The stress test results will not be credibly interpreted as a sign of of bank health ”
Professors Nouriel Roubini and Matthew Richardson, New York University
Wells Fargo and GMAC, the financial arm of General Motors, may also be required to raise extra cash, but the New York Times said that the 19 banks will need less than $100bn in total - less than some had feared.

Stock markets worldwide have gained on hopes the stress test results may prove a turning point in the financial crisis.

Careful look

US banks are being tested to see if they have sufficient cash reserves to cope should the recession worsen.

"We brought the nation's financial supervisors together, and in an unprecedented step, asked them to do a careful look under the hood, to take a careful look at how much - how strong these institutions were in the event things got worse," Mr Geithner said in a television interview with the US's Charlie Rose Show.

The results would bring transparency and improve confidence in the banking system, he said.

Mr Geithner said he believed that the majority of the banks would be able to raise money from private sources but if they were unable to do so the government may have to provide them with more taxpayer money.

"None of these 19 banks are at risk for insolvency," he said.

He added that if the government's stakes in any bank were to rise above 30% as a result of extra capital injections, the government would consider taking a more active management role.

"If we face those situations, we'll have to make judgements about whether the quality of leadership of those board is strong enough so that, again, our interest are met best," Mr Geithner said.

Criticism

Some analysts have been critical of the stress tests.

Professor Nouriel Roubini and Professor Matthew Richardson of New York University say that the doomsday scenario that the banks' books have been subjected to is actually no worse than the current economic situation.

And as such "the stress test results will not be credibly interpreted as a sign of of bank health", they wrote in the Financial Times.

Others say that the tests do not take account of the banks' varying business models.

What's $100 billion between friends?