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NEWS: 2/24/09

2/24/09 – Bank’s Reluctance to Lend

Despite the billions of dollars our government is spending to help our financial industry, the “big banks keep insisting they have all the capital they need.” If this is true, why are loans and investors so difficult to come by?

Stock market investors and the banks are constantly in disagreement on how capital should be measured and if financial institutions are in a healthy state. The banks currently may have a plethora of capital – but it is not the kind capital investors think the banks need.

Federal regulators are to begin “stress tests” on 20 large banks to assess whether they would be able to withstand a harsh economic downturn. The results of this test could largely determine the futures of lenders. Many lenders fear an increase in government ownership.

Until last fall investors centered their attention on a bank’s common stock, preferred stock, and hybrid debt-equity (tier 1 capital). Recently, they have shifted focus to only common stock (tangible equity capital), believing it is a more effective way of measuring risk in bank shares.

The stress test will determine how much additional capital may be needed if the recession worsens, the home market drops another 20% and unemployment rises to about 10-12%. Institutions who fail the stress test will be required to raise more capital, most likely by receiving more government money.

- New York Times: Stress Test for Banks Exposes Rift on Wall St. - Eric Dash

"If I accept you as you are, I will make you worse; however if I treat you as though you are what you are capable of becoming, I help you become that"

- Johann Wolfgang von Goethe