Bank stocks regained ground on Wednesday as the US Treasury finally revealed details of a rescue plan that could lead to the partial nationalisation of some of the biggest US banks.

Meanwhile, White House press secretary Robert Gibbs hinted that Thursday’s budget could provisionally allow for additional spending on bank recapitalisation – over and above the funds remaining in the Troubled Asset Relief Program. Experts think the Obama administration could need as much as another $750bn.

Under the rescue plan, US banks will have six months to raise enough private capital to continue lending through a deeper-than-expected recession – or be forced to take a form of government capital which would convert into ordinary shares.

“US government ownership is not an objective” of the programme, Treasury said. “However, to the extent that significant government stake in a financial institution is an outcome of the programme, our goal will be to keep the period of government ownership as temporary as possible.”

Treasury secretary Tim Geithner and Federal Reserve chairman Ben Bernanke both said the alternative of regulatory seizure and outright nationalisation of weak banks was not the best way forward.

Sentiment toward bank credit improved slightly but risk premiums continue at highly elevated levels as investors apparently craved more explicit assurance that no big bank would be allowed to fail.

Officials said the top 19 US banks would be subject to a stress test based on a scenario in which the economy shrinks 3.3 per cent this year and barely grows next, with unemployment averaging 8.9 per cent this year and 10.3 per cent in 2010.

A senior administration official said the hope was that by strengthening the big banks pre-emptively they would make this adverse scenario less likely.

Richard Bove, an analyst at Rochdale Securities, said “investors are not going to argue with the criteria in the stress test”. Some appeared relieved that the test conditions were not tougher.

Bank regulators will look at the quantity and quality of capital a bank would need so as to be able to continue lending in such an environment. Banks will be required to ensure they meet the capital need identified by the regulators either from the government or private sources. They will be able to delay taking the government’s convertible capital for up to six months if they think they can obtain equity elsewhere.

The government’s convertible preferred stock will carry a 9 per cent interest rate and convert into equity at a 10 per cent discount to the average price over the 20 days to February 9.

The KBW bank index, which was down as much as 7.6 per cent during the day, rallied after the plan details were disclosed and closed 2.4 per cent higher.

Additional reporting by Aline van Duyn and Greg Farrell

Get alerts on Equities when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article