Mark Lamb | Wednesday, 13 May 2009

Stress test

Weekly international investment round up to 12 May 2009

• How healthy are America’s top banks?

• Anxiety remains over high unemployment levels

Feeling stressed? For many individuals the economic situation may well be sending blood pressure readings ever higher but exactly how do you gauge the stress of an organization such as a bank?
America’s largest financial institutions have just undergone a ‘stress test’, not only to see how they are coping under the current tough market conditions but also to evaluate how they would do should the scenario worsen.
American treasury officials tested nineteen banks representing two-thirds of the country’s total banking assets as part of the wider process to restore faith in this vital but beleaguered sector. Back in February when the tests were first announced confidence levels in American banks were extremely low with speculation mounting that some would even have to be nationalised following huge losses throughout the sector which had also seen some failures and forced consolidations.
In typical bank thinking methodology the ‘stress tests’ were based on a range of assumptions and possible scenarios such as; what would the impact be upon their balance sheets should unemployment rise to 10.3 per cent? What if home prices plunge a further 22 per cent? What if overall economic growth contracts by 3.3 per cent? Clearly, under such scenarios loan defaults would rise while profits from car loans and credit cards would significantly reduce but obviously the real reason behind the tests were to establish how much money the banks actually need in order to stay in business and to keep lending.
Out of the nineteen tested, ten require extra capital amounting to $74.6 billion and must give US regulators their plans detailing how they will raise this capital by 8 June. Needing to raise the most is Bank of America with $33.9 billion followed by Wells Fargo at $13.7 billion while GMAC is judged to require an extra $11.5 billion.
Although more than half the banks which sat the test now need to raise extra capital, encouragingly the results have been well received by the markets as there were no real surprises in its findings. In fact, based upon data shown on Bloomberg the ‘KBW Bank Index’ which tracks 24 of America’s largest banking stocks has shot up by over 40 per cent since February, giving anxious investors some stress relief.
In summary, if the US banks were a patient they would now appear to have survived the operating table while remaining heavily sedated in the intensive care ward under close supervision.
While investors in the US may now find their blood pressure easing, American unemployment figures remain traumatic. The very fact that the ‘stress test’ given to the banks actually asks them to consider the impact on their businesses should the jobless rate hit 10.3 per cent is sobering. And while analysts may be pleased that the increase in the American unemployment rate slowed last month their economy is still losing jobs at a fast pace and in total 5.7 million jobs have been lost since January last year. Stress indeed.
While the American ‘stress test’ for banks may help inject some much needed confidence the best economic stimulus plan which can be prescribed remains a job.

Mark Lamb is Head of the Life Dept. at Citadel Insurance plc which is authorised to carry on general and long term business of insurance under the Insurance Business Act, 1998 and is regulated by the MFSA. Contact by email; [email protected] Tel; 25579000. Website;
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek financial advice before making any investment decision.



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Stress test


13 May 2009

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