Some of the U.S. banking giants have been ordered to find additional capital by regulators to protect themselves in the event of a severe economic downturn.
Ten of the 19 largest U.S. banks are expected to raise tens of billions of dollars in capital once the results of government stress tests of their ability to confront and overcome a deep recession are released Thursday at 5 p.m. EDT.
Despite the reported capital shortfalls being much larger than analysts expected, bank shares soared as investors got more clarity over how well the industry will cope with perhaps the most severe recession since World War II.
Among banks needing capital, Bank of America Corp shares closed up 17.1 percent, Citigroup Inc rose 16.6 percent and Wells Fargo & Co rose 15.6 percent. The Standard & Poor's Financials Index gained 8.1 percent.
The market likes the certainty of putting numbers on the worst-case scenarios of how much capital these banks need, said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California.
According to Wall Street Journal, Wells Fargo needs $15 billion, Morgan Stanley (MS.N) needs $1.5 billion and Regions Financial Corp (RF.N) needs some capital too.
Banks were advised to cover their capital shortfalls through a mixture of asset sales, share sales and perhaps the conversion of the preferred shares into common stock.
Banks have 30 days to come up with a plan and implement it and have it running by November 9. Proper leadership must also be ensured at these banks with a review of the management and board of directors.