From the ABA:
ABA STATEMENT ON “STRESS TESTS”
by Edward L. Yingling, president and CEO, American Bankers Association
“The results of the stress tests should put to rest the harmful speculation we have seen over the past few months. After extensive analysis of what additional capital might be needed to provide an extra cushion against a negative scenario, the regulators have: first, confirmed that all 19 banks are well capitalized; and, second, indicated that, generally, existing total TIER 1 capital levels are adequate to meet even the negative scenario.
“Several aspects of this announcement continue to be largely overlooked:
“First, while additional tangible common equity (TCE) will be required in some cases, generally the TIER 1 capital levels already meet the stress test total. The regulators are, in effect, changing the existing rules and requiring that a higher TCE percentage be held within the TIER 1. Thus banks are not required to have additional TIER 1 capital; they are required in some cases to change the mix of their capital. While the market, and now the regulators, have apparently decided to focus on TCE, there is, in fact, little empirical evidence to support the theory that the mix of TIER 1 capital needs to be changed.
“Second, while some commentators continue to question the assumptions behind the stress tests, the loss ratios included in the tests are, in fact, very severe and very unlikely to be reached.
“Third, it appears the regulators were extremely conservative in allowing for increased revenue projections to be included by the banks – revenues that will reduce the need for more TCE.
“Fourth, the requirement to increase components of capital beyond well capitalized is an extraordinary action. It is the creation of a buffer on a buffer. In fact, this action, which is pro-cyclical, is contrary to the recommendation last month of the G-20, which stated that capital policy should be counter-cyclical.
“Fifth, much of the additional TCE required for some firms will be raised from private sources or by conversion of existing preferred shares held in the private sector. Where necessary, existing government preferred under the CPP program may be converted to the convertible preferred under the CAP program. This new CAP security is not common equity until it is converted, and it may well never need to be converted. However, the convertible preferred is TCE.
“These results show that our banking system is fundamentally sound despite the very difficult economic times we face. Our banks entered this deep recession with historically high capital levels, and that, together with the prudential steps they have been taking, have put them in a position to support a return to economic growth.
“It should also be emphasized that it is highly likely that the government is going to not only have its overall investment repaid, it is going to make a significant profit.
“Stress tests are nothing new. Banks perform them all the time, and the regulators are conducting them all the time. What’s new about the current tests is the public discussion of the tests, the simultaneous testing of the largest banks in the country, and the requirement of a buffer over the well capitalized standard.
“No matter what the result of these tests, consumers can take comfort in the fact that their deposits are protected by the FDIC. No one has ever lost a penny of an FDIC-insured deposit.
“Our diversified industry of 8,300 banks with 97,000 locations nationwide stands ready to serve customers. The vast majority of banks have been in existence for decades and the industry is taking prudent steps to assure that banks will continue to serve their communities for many, many more decades to come.”
