Earlier this month, the US government has noticed $74.6billion capital drop in ten of its largest nineteen financial institutions, reported financial times.
The government’s stress-case tests would result in capital shortfalls for 38 % of the 200 banks below the nineteen largest financial institutions, leading to a deficit of around $16.2billion in common equity, reported Sandler O’Neill.
Analysts say that the public release of the government’s test methodology and capital adequacy philosophy means that the tests’ standards will become a model for the rest of the US banking system. The application of the stress tests on large banks could make some smaller banks vulnerable.
Some smaller banks may either struggle to raise capital or have less flexibility to do so. That, in turn, could lead to a flurry of takeovers, reported financial times.
In order to exist in this poor economical market, the regulators and the investors of the banks are aiming to increase their focus on the next tier of lenders.
However, the US Treasury has said that it does not intend to extend the stress tests beyond nineteen top institutions it has examined.
Robert Albertson, chief strategist at Sandler O’Neill said: “This will ultimately migrate down the banking industry no matter what Treasury says.”
“At some point there’s going to be massive consolidation. But for now, a lot of banks are going to raise as much capital as they can.” added one industry banker.
