Banks Are "Stressed Out" Over Tests

Financial institutions across the U.S. are bracing themselves for stress testing by the U.S. Treasury.  The results of these stress tests will determine which institutions are healthy enough to survive and which ones are terminally ill.   Last Friday, the Wall Street Journal highlighted the results of one research firm's recent stress test report.  

"Bank and thrift failures are a function of capital, liquidity and regulatory risks. Some of the largest "failures" of last year were the result of a combination of these factors," the stress-test report by Sanford Bernstein said.  Liquidity refers to money banks need to fund their day-to-day operations. Longer term, capital is needed to make investments and, most importantly right now, to provide a cushion for delinquent loans.  Liquidity risk is largely mitigated at this point -- banks are liquid enough to be able to make the loans their borrowers want. But capital and regulatory risk are "alive & kicking," the report said. While regulators put in place programs to prevent bank failures through capital infusions, those programs could essentially wipe out common equity at some banks, leading to "common equity failures," Sanford Bernstein wrote.

The next 4 - 5 months will be very interesting and could result in a completely different landscape for financial institutions.  Expect a great deal of change and upheaval as these capital and regulatory risks begin to crystallize.