Grading The Stress Test On A Curve

By MICHAEL GRAY

So Treasury, FDIC and other federal bank regulators have released their report cards for the 19 biggest institutions and there were no Fs.

It appears there was some grade inflation though. I cannot get a comment, but it appears from the report that the worst-case scenario was not used to account for the needed capital.

In April, Treasury offered three parameters for the different economic outlooks used to determine bank viability, which had more dire levels for unemployment and GDP growth. Although specific economic assumptions were not listed in the report, it appears from the capital requirements that a middle road model was used for the report.

The report says it’s using the “More Adverse Scenario,” which tells me the regulators are not using the “Most Adverse Scenario.”

Some interesting points in the report:

•    The total write-downs for these institutions since the credit crisis began are estimated at $400 billion. The report is suggesting that there will be $600 billion yet to come in the next two years. That number should give pause for a quick turnaround.

•    The most vulnerable banks from losses on a risk-weighted assets are:

American Express
Capital One
Citigroup
State Street

•    The most vulnerable banks from losses on a risk-weighted assets to mortgage losses:

CapOne
GMAC
JPMorgan
Wells Fargo

•    The most vulnerable banks from losses on a risk-weighted assets to commercial real estate:

Morgan Stanley (almost 4x the median)
State Street
GMAC

The stock market will bid up these stocks since no one is in dire need of capital and the feds are providing the final backstop on an if needed basis.

I do not think this is the all-clear signal for the banking industry though. I believe these companies will see another leg down.

For more on Wall and Washington and the economy see: http://mgray12.wordpress.com

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