U.S. officials to brief banks on ‘stress test’ results

Regulators plan to brief the nation’s largest banks today on the final results of federal tests to determine whether the companies have sufficient reserves to weather the recession.

Preliminary results showed that firms including Bank of America Corp. and Citigroup Inc. needed to strengthen their capital reserves, according to people familiar with the matter. Financial analysts believe that several other banks, including San Francisco-based Wells Fargo & Co., also might be required to take remedial action.

Bank executives continued to meet with regulators Monday to push for adjustments in the findings, contending, for example, that their earnings would exceed the government’s forecasts.

Banks also are racing to develop plans to raise needed money without turning to the government.

Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, an industry group, said banks would have to share those plans with investors relatively quickly after the final results of the “stress tests” are announced Thursday.

“You can’t leave that out there,” Talbott said.

After months of internal debate about how much to tell the public about the tests of 19 major banks, the government is expected to release detailed loss projections and capital needs for each institution.

The announcement is expected to divide banks into three categories, based on the adequacy of their capital reserves to absorb projected losses. The tests are based on an economic forecast about the likely depth of the recession.

Some banks are expected to get a clean bill of health, which the government hopes would persuade investors to embrace them.

Regulators plan to tell a second group of banks to strengthen their capital reserves, or buffers against losses. Banks in this category are likely to boost a closely watched measure of capital by forcing holders of the banks’ preferred shares to exchange them for common stock.

Although preferred shares are counted in some measures of capital, such stock is often structured like debt that must eventually be repaid and therefore is regarded by the markets as an unstable reserve.

Banks in the third group, the most troubled, are to be told they must either raise money from private investors or sell assets to reduce their need for capital.

The institutions will have six months to satisfy regulators before they will be forced to accept federal aid.

Fresh government investment is a last resort that the Obama administration hopes to avoid, White House Press Secretary Robert Gibbs said Monday.

“I think everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control,” Gibbs said.

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Appelbaum writes for the Washington Post.