US bank fears over stability plan

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Washington’s “financial stability plan” has fuelled some of the most volatile trading in recent history for US regional bank stocks.

US regional banks
-Market value ($bn)10-day change (%)
Huntington Bancshares0.7-37.4
Marshall & Ilsley1.0-36.3
SunTrust Banks3.2-30.6
Regions Financial2.2-20.6
Fifth Third Bancorp1.3-16.1
KeyCorp3.3-15.8
Source: Thomson Reuters

Investors’ high hopes for the plan, which led to soaring stock prices for regional banks last week, were spectacularly dashed on Tuesday by the lack of detail in the rescue initiative. Several regional bank stocks lost more than a quarter of their value amid fears that the plan would amount to a creeping nationalisation of the US banking system.

Regional banks accounted for six of the 10 biggest falls in the S&P 500 following comments from Tim Geithner, Treasury secretary, on Tuesday. Huntington Bancshares, Regions Financial, SunTrust Banks, KeyCorp, Fifth Third Bancorp and Marshall & Ilsley all lost more than 25 per cent. The stocks recovered a little in morning trade on Wednesday, swinging higher by between 5 and 15 per cent.

Investors fear the Treasury’s new measures – the details of which are yet to be fleshed out – will not restore confidence in the banking industry, fall short of cleaning up balance sheets and prevent banks from raising private capital. But for the regional banks, in particular, there are fears that the plans could do more harm than good, say analysts.

Much will depend on how the Treasury’s scheme values toxic assets that will be sold to a new $1,000bn public-private “bad bank”, the design of which is still unclear.

Regional banks have continued to hold many troubled housing assets at valuations far above where the loans could be sold in the secondary market. Sales of such assets to the Treasury’s “bad bank” at severely distressed market prices could force banks to take severe markdowns on loans they have kept on their balance sheets. In turn this could erode regulatory capital.

Investors also fear a regulatory stress test mandated by the Treasury’s plan will highlight new weaknesses in the balance sheet and loan portfolios of the banks, particularly if they are forced to take new markdowns on previously unimpaired assets.

All banks with more than $100bn in assets will be required to undergo the stress test to determine whether large financial institutions have enough capital to continue lending and absorb potential losses in a more severe downturn.

Banks that fail the stress test will be given additional capital in the form of convertible preferred securities, providing the government with a larger stake in the banks that could dilute existing shareholders and deter private capital.

Many of the fears investors share would only materialise in a worst case scenario. Yet until there is clarity on the government’s plans, such a worst case could still materialise.

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