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April 28, 2009

Bank of American and Citibank — More Capital Please!

The Federal Reserve conducted stress tests on 19 of the nation’s biggest banks, their aim was to determine which banks are healthy enough to survive another financial shock and which may need additional government support.

Based on the results of the stress tests government regulators have told Bank of America Corp. and Citigroup Inc that they need to get their capital reserves together! The capital shortfall at BoA is believed to be in the BILLIONS.

It sounds to me as if executives at BoA and Citi are still in denial and don’t believe that the stress tests are correct since they have objected to the findings and are planning to respond with “detailed rebuttals” that will show that they do not need to have more capital if they have  another financial meltdown. 

Government officials did say that even though BoA and Citi are being told to raise more capital — they shouldn’t be viewed as insolvent — they just need to shore up their assets and make sure that they are in excellent financial order — not just mediocre financial order.

The additional capital is intended to cushion the banks against potential future losses should economic conditions worsen.  Federal officials have also reiterated in the report that they won’t allow any of the top 19 banks to fail.

It is also believed that regional banks with large commercial real estate loan portfolios such as Wells Fargo, Fifth Third Bancorp and Regions Financial Corp may have also performed poorly on the stress tests and are likely to need additional capital as well.

Banks will be given until mid-week to file their formal responses, which may lead in turn to several days of negotiations with the examiners.

Sheila Bair, Chairman of the Federal Deposit Insurance Corp. said her agency should have the authority to close even the biggest lenders. The “too-big-to-fail concept” should be “tossed into the dustbin,” and the FDIC should have the power to close “systemically important” financial firms. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program,” she said.

I don’t know about you, but I think these banks should err on the side of caution and have more capital than they need versus having less.  Depositors should be able to have peace of mind and confidence in their banks, especially in the larger national banks that dominate most markets.

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