WASHINGTON - After subjecting the nation's 19 biggest banks to the most public scrutiny in decades, federal regulators ordered 10 of them yesterday to raise a total of $75 billion in extra capital and gave the rest a clean bill of health.
The long-awaited results of the "stress tests," a central part of the Obama Administration's plan to restore the financial industry to health, set off an immediate scramble by major institutions for more capital, which they must raise by November.
The verdict was far more upbeat than many in the industry had feared when the tests were announced in February. And the banks that came up short will have to raise much less than some analysts had expected as recently as a few days ago.
Bank of America was told it would have to come up with $34.9 billion. Wells Fargo will have to find $13.7 billion. And Citigroup must produce another $5.5 billion, on top of the $45 billion that it already had planned to acquire by letting the Treasury become its biggest single shareholder.
Also among the 10 banks that the government decided need to raise money are Cleveland-based KeyCorp ($1.8 billion) and Cincinnati's Fifth Third ($1.1 billion).
The nine banks that were told they do not need to raise more capital are: JPMorgan Chase & Co., Goldman Sachs Group Inc., MetLife Inc., U.S. Bancorp, Bank of New York Mellon Corp., State Street Corp., Capital One Financial Corp., BB&T Corp., and American Express Co.
The banks that need more capital have until June 8 to come up with a plan to raise the additional resources and have the plan approved by their regulators.
Banks that need more capital will be given six months to raise money in the private markets. After that, the government will provide money from its $700 billion financial system bailout fund if needed.
The government said its analysis showed that only GMAC - the financing arm of General Motors - was likely to need additional taxpayer aid.
GMAC will need to find $11.5 billion in capital. Last week, the government gave GMAC more federal funds after it agreed to be the lender for purchasers of Chrysler vehicles while Chrysler is under bankruptcy protection. Earlier this year, the Treasury supplied the company with $5 billion through its Troubled Asset Relief Program.
The stress tests were aimed at estimating how much each bank would lose if the economic downturn proved deeper than expected. But regulators gave the banks a break by letting them bolster their capital with unusually strong first-quarter profits and also by letting the banks predict modest profits even if the economy again turns down.
Despite an almost tangible sense of relief among the banks and investors, the report card is unlikely to silence an intense debate over whether the Treasury Department and the Federal Reserve let the banks off too easily and glossed over their real problems.
Under the worst-case situation - an unemployment rate of 10.3 percent next year, an economic contraction of 3.3 percent this year, and a 22 percent further decline in housing prices - the losses by the 19 banks could total $600 billion this year and next, or 9.1 percent of the banks' total loans, regulators concluded. That rate of loss would be higher than any other since 1921, including the losses during the Great Depression.
But while the adverse situation was supposed to be unlikely, it is not that much worse than what has happened so far. Unemployment hit 8.5 percent in April and could top 9 percent as early as today, when the Labor Department releases its employment report for May.
Regulators and bank executives alike predicted that most of the institutions would be able to build up the necessary capital from private sources - either by selling off assets or by converting shares of preferred stock into ordinary stock.
Wells Fargo immediately announced that it would raise $6 billion through a new stock offering. Morgan Stanley, which was told to raise $1.8 billion, announced plans for a $2 billion stock offering.
Regulators said they would not subject the rest of the nation's banks to similar stress tests or require them to have additional capital buffers.