Tuesday, May 5, 2009

Tests Said to Show Bank of America Has Biggest Capital Need

Regulators have determined that Bank of America Corp. has the largest need for new capital among the 19 biggest U.S. banks subjected to stress tests, according to people familiar with the matter.

Citigroup Inc.’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, the people said. JPMorgan Chase & Co. doesn’t need a deeper reserve against potential losses over the coming two years, according to people familiar with that company’s result.

The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Federal Reserve publishes the stress tests results May 7. Firms requiring more capital could raise all the funds through conversions of preferred shares if they choose, according to people familiar with the matter.

“To the extent that there are banks that need capital, our hope is that many of them will be able to raise that capital through either private equity offers or through conversions and exchanges of existing liabilities,” Federal Reserve Chairman Ben S. Bernanke told lawmakers at a hearing in Washington today. “The data we have are accurate reflections of the financial conditions of those banks.”

Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.

Repayment Conditions

The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.

Bank of America, which absorbed Merrill Lynch & Co. in January, needs about $31 billion in capital, according to one estimate by Friedman, Billings, Ramsey Group Inc. analysts based in Arlington, Virginia.

Charlotte, North Carolina-based Bank of America spokesman Scott Silvestri declined to comment.

Chief Executive Officer Kenneth Lewis declined to discuss the stress tests at Bank of America’s annual meeting last week, citing the Fed’s instructions to banks. On April 20 he said, “We absolutely don’t think we need additional capital,” responding to an analyst’s question.