It’s well known that the bank stress tests were as much a measure to build confidence as to shore up ailing banking practices, so it wasn’t a surprise when 9 of the 19 banks that underwent the stress test passed with flying colors.  The other 10 banks were asked to raise additional capital in the event of worsening economic conditions.  Bank of America lead the pack, with a need to generate an additional $33.9 billion in revenue.  BofA’s $33.9 billion needed represented almost half of the total $75 billion the 10 banks were asked to raise, with Wells Fargo & Co. trailing a distant second at $13.7 billion.  Despite these big banks needing to raise a significant amount of capital, all were deemed solvent by Ben “The Bernankinator” Bernanke before the results were released.  Bank stocks rallied on the stress test results, most of which had been leaked throughout the week leading up to the Thursday release.

For most, the results of the stress tests were welcome, but not unexpected.  The 9 banks that passed the stress tests with flying colors, including Goldman Sachs, American Express, and JPMorgan Chase, were out with statements following the results that boasted commitments to safe and sound banking practices and responsible lending that helped them through the crisis.  Following the results, American Express became the first major financial institution to put forth a formal request to return federal bailout money provided under the Troubled Asset Relief Program (TARP).  Numerous banks had broached the subject in the past months, but requests were denied or ignored by President Obama, who compared the banks to patients who wanted to stop taking mediation as soon as their health improved.

Most of the 10 banks that didn’t fare as well in the stress tests released immediate plans to generate capital through numerous different practices.  Citigroup, needing an extra $5.5 billion, stated that it’s planning to convert $5.5 billion of preferred shares (a kind of debt) into common stock to help generate capital.  The other banks had different plans that sounded feasible, at least on face.  GMAC, the #2 contender for the most needed capital at $11.5 billion, seems like it will have the most trouble generating revenue.  GMAC accepted a $5 billion loan from the Treasury in December, and posted a 2009 first quarter loss of $675 million.  Even still, GMAC stated it will raise the $11.5 billion within six months.

While the 19 banks had different individual comments for the stress test results, all were resolute on one point: no further government assistance was needed.  Banks that might not have made it through the market collapse last fall are now turning inside out to show that additional federal help isn’t required.

There are two basic reasons banks don’t want further government assistance, the first being that banks don’t want to appear to consumers as if their bank is weak and in need of said assistance.  The second reason is that while the government is invested in the banks, it has leverage on their business practices.  Banks like Goldman Sachs, which was forced to accept aid despite being solvent back in the fall, want off the government lifeline as quick as possible.  Goldman Sachs was one of the few banks not in danger of collapse, and it comes as no surprise that the stress tests results favored their business model.

For most of the banks that received federal aid, there’s no question that government intervention helped them remain afloat last fall during the market collapse.  But some are now asking with the stress test results in, is it time to take the peak performers off life support?

Despite the government’s best intentions, several critics are curious as to whether the stress tests accomplished their goal.  The stress tests were designed to simulate how the 19 banks would fare if economic conditions took a turn of the worse; with the unemployment rate dropping to 10.3% in 2010, and nationwide house prices falling more than 22%.  The April unemployment figures were released Friday; the nationwide unemployment rate dropped to 8.9%, a mere 1.4% from the stress test’s 10.3% figure indicating dire straits.  The rate at which unemployment fell was less; however, 8.9% is still a 0.4% increase from March’s 8.5%.  If the current rate of decline were to persist, the nationwide unemployment could be at 10.3% by the middle of July.  This begs the question, were the bank stress tests stressful enough?  Numerous economists would argue, “No”.

While the unemployment rate continues to move closer to the 10.3% figure, nationwide housing prices have seen some increases in recent months, and don’t show signs of falling to the 22% level.  Bernanke, in a statement issued before the results of the stress test results were revealed, said:

A principal lesson of the crisis is that an approach to supervision that focuses narrowly on individual institutions can miss broader problems that are building up in the system.

For the time being, it seems we must trust that the stress tests did enough to prepare banks for the worst, and also that the economy is on the mend.  If economic conditions worsen beyond the conditions the stress tests simulated, it’s possible the banks will require a lot more federal aid. 

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