The United States' largest banks made their case to regulators on Monday that they have the financial firepower to withstand a deeper recession, as Bank of America denied a report it was trying to raise $10 billion.
Banks and regulators were in tense discussions over the findings of so-called stress tests aimed at assessing whether the 19 largest firms have a sufficient capital cushion. Final results are expected to be disclosed on Thursday.
Today is going to be a very key day in negotiations, a financial industry source said, speaking anonymously because the banks' discussions with regulators are not public. Things are particularly tense.
U.S. officials are expected to brief banks on Tuesday on the results and on how they will be publicly unveiled.
Banks found to be lacking adequate capital reserves will have to embark on a capital recovery plan that could involve converting preferred stock, raising fresh private capital, or accepting government help -- assistance that comes with close scrutiny from Congress that will certainly be unwelcome on Wall Street.
Pouring more public money into banks would also put political pressure on President Barack Obama, whose administration is keen to avoid asking lawmakers to approve more bailout money for shortfalls that some analysts think may reach $150 billion.
White House spokesman Robert Gibbs on Monday said that the administration does not see a need to ask the U.S. Congress for additional funds to support banks, and that the banks will be encouraged to seek extra funds through private sources.
I think everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control, Gibbs said.
He also said that the banks themselves will determine which steps they will take to raise capital. They'll have a certain amount of time to put together a plan that meets...the test of regulators to ensure that stability, Gibbs told reporters.
Some banks have complained that regulators were too harsh in their assessment over how much of a buffer they need to absorb future losses, and were underestimating profitability.
The banking system can handle an awful lot of loss and be okay, JPMorgan Chase & Co
NOT SO BAD?
Bank of America Corp
The KBW Banks index <.BKX>, which includes about two dozen large banks including Bank of America, rose more than 9 percent.
But investors remained on edge as Thursday's deadline neared. The Associated Press reported that Wells Fargo
Private sector analysts were crunching their own numbers, and at least one of them found that balance sheets may not be in as bad shape as feared.
David Trone, a Fox-Pitt Kelton bank analyst, said he expected Thursday's results to show a few banks were in need of more capital, although the shortfalls would probably be modest and bank stocks won't collapse.
The U.S. Federal Reserve and other regulators have spent the past few weeks poring over holdings of the 19 largest banks, examining real estate and other assets that have lost significant value as the housing market crashed.
The process aimed to gauge how banks would hold up if the economy were to continue its steep descent and home prices fell another 22 percent this year and 7 percent in 2010.
(Reporting by Emily Kaiser, Karey Wutkowski and Jeff Mason; Editing by Theodore d'Afflisio)