The share prices of two large banks fell after it emerged that regulators had informed them that they may have to raise more capital. The banks affected are Bank of America and Citigroup. Citigroup shares fell by 5.9%, whilst Bank of America shares were down by 8.6%, as a result of the news. The Wall Street Journal stated that, the results of stress tests indicated that these banks could need further capital in order to shore up their balance sheets.
Financial regulators have already informed the US’s 19 largest banks of the results of their stress tests, the rest of us will have to wait until the 4th of may, when these results will be made public. The purpose of the test is to establish how robust a bank is financially, by establishing if the bank has sufficient reserves of capital to survive in a worsening economic climate.
The difficult economic climate has compounded problems for the banks and worries that overcommitted consumers, and those with debt problems, may be unable to meet monthly loan and credit card debt repayments, has simply added to the pressure. The global downturn has led to an increase in the number of people in financial difficulty, and unable to meet their commitments to the banks. This has left large numbers of consumers in need of some form of debt relief or alternative debt solutions such as IVAs, Debt Management Plans or Trust Deeds. Regulators are concerned that if the recession worsens, a bank may run out of cash.
The stress tests are not intended to be a measure of solvency for the banks; they are intended to establish whether or not there is a need for the bank to raise more capital. The Federal Reserve stated that the tests demonstrated that most banks would not be required to raise more capital.
