Markets Await Results of Stress Tests

As the Federal Reserve prepares to officially disclose results of the stress tests to U.S. bank executives later today, about half of the largest financial firms subject to those checks are expected to be directed to bolster their capital positions to endure further losses.

While the exact number of banks falling short of regulatory criteria among the 19 lenders under review remains a matter of speculation, reports have indicated that Bank of America Corp. (BAC - Analyst Report), Citigroup (C - Analyst Report) and Wells Fargo & Co. (WFC - Analyst Report) would possibly need fresh capital. The government is scheduled to discuss results from the stress tests publicly on May 7.

When the Obama administration announced the stress tests back in February, investors were concerned that the financial institutions failing to pass muster would be shut down or nationalized. However, regulatory authorities have assured shareholders that none of these banks would be allowed to fail and would have access to emergency government funds if required.

As the day for the final results drew closer, financial markets were hopeful that the capital shortfall at banks will be manageable. Shares of all three banks that are feared to need additional capital have tripled their value since early March.  

Administrators have pointed to various options that might help large banks to strengthen their balance sheets without seeking refuge of the Troubled Asset Relief Program. While some like Goldman Sachs Group Inc. are already resorting to new stock offerings, others may sell assets to raise capital. However, whether those assets will have to be sold at steep discounts remains unclear.  

Separately, private investors are expected to show renewed interest after reports that the financial downturn is finally easing. Banks also have the choice of meeting capital requirements by converting preferred shares issued to the government last fall into common stock.

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