The US government today prepared to draw a line separating weak banks from strong ones in an attempt to put the worst of the financial crisis behind it.
The results of "stress tests" of the 19 largest US banks - due at 5pm EDT (10pm Irisj time) - are the culmination of a months-long exercise aimed at reviving the financial system and are expected to show about half the banks need more capital.
The government is focused on banks filling shortfalls in their equity capital - an amount that Goldman Sachs analysts estimated could total $130 billion this year. That estimate included what the stronger institutions would need to raise to pay back government money and funds the weaker ones need to fill shortfalls.
Share prices in banks broadly have climbed about 50 per cent since the stress tests were first announced as part of a wider plan to revive the sector in February. But today, the KBW Banks Index slumped 4.8 per cent, and some investors viewed the stress test results as spelling an end to that rally.
"From my perch, investors should sober up and reduce their holdings in financials now," hedge fund manager Doug Kass said in a note to clients. "Financial stocks are now priced to perfection." In an interview, Mr Kass said he is selectively selling short some bank stocks.
Federal Reserve chairman Ben Bernanke described the tests as a fair and comprehensive effort that he hoped would allow markets to have "greater confidence that they know the condition of the banks".
"[Markets] can be reassured that banks will be strong and be able to lend even if the economy is worse than currently expected," he said.
The tests "remove some cloud of uncertainty from this chapter of the banking industry saga," said Craig Peckham, equity trading strategist at Jefferies & Co in New York.
Mr Obama's team appears to have managed market expectations well, getting the worst news from the stress tests out two days ago - that Bank of America needs as much as $34 billion in common equity capital.
"It looks like a pretty well choreographed dissemination of information," said Mr Peckham, adding that Washington has managed to mitigate the impact that surprise results might have on stock markets.
The American Bankers Association criticised the severity of the stress tests and said there was no evidence banks need to change the make-up of their capital. But it said the test results should end "harmful speculation".
Reuters