Stress test pdf
Ten of the nineteen banks need to raise more capital, according to the results of the Supervisory Capital Assessment Program, or SCAP.
The winners: American Express, BB&T, Bank of New York Melloncorp, Capital One, Goldman Sachs, JP Morgan Chase, MetLife, Inc., State Street Corporation, US Bancorp
The losers:
- Bank of America, $33.9B
- Citigroup, $5.5B
- Fifth Third, $1.1B
- GMAC LLC, $11.5B
- Keycorp, $1.8B
- Morgan Stanley, $1.8B
- PNC Financial Services Group, $0.6B
- Regions Financial, $2.5B
- SunTrust, $2.2B
- WellsFargo, $13.7B
The Pareto Principle, in which 20% of population X can be assumed to have 80% of Y. is in force: the top four banks need $64.6B in extra capital to bring their reserves up to 6% of Tier 1 capital.
The total is $75 billion dollars, to be raised from private and public sources, preferably private sources.
It has been argued that the worst-case unemployment assumption of 10.3% is too optimistic, especially when comparing with the Great Depression. This argument fails to recognize that U6 unemployment (including involuntary part-timers) corresponds best with Depression unemployment. The unemployment rate here is U3. If the tendency for U6/U3 to equal 1.8 is maintained, the U6 unemployment would be 18%-19%, which is higher than the U6 for most of the depression.
Loan defaults in the worst-case scenario are assumed to be 9.3%, higher than in the 1930s. The worst-case scenario assumes $600 billion in losses; bank actions to date and a stronger-than-expected 2009Q1 took $110B off the anticipated SCAP need, reducing it to $75B. The current loan-default rate is about 2%.
This would make it appear that the worst of the US banking crisis is over.
Appendix: The Wiki on Tier 1 Capital
A good definition of Tier I capital is that it includes equity capital and disclosed reserves, where equity capital includes instruments that can't be redeemed at the option of the holder (meaning that the owner of the shares cannot decide on his own that he wants to withdraw the money he invested and so cannot leave the bank without the risk coverage). Reserves are held by the bank, and are thus money that no one but the bank can have an influence on.