Stress test results out tomorrow

It is like waiting for exam results; will the US banks get the grades they need to continue trading?

Actually, this stress test is turning out to be a bit like UK A Level results. Everybody passes with A grades, but only a select few get into Oxford. All US banks will be told that they aren't insolvent, but nevertheless, they need more capital. Only a select few will be told that they are fine.

Here is how the FT assessed the likely outcome of tomorrow's stress test announcement....

US financial stocks soared on Wednesday as investors expressed relief the capital shortfalls identified by the government’s “stress tests” at large banks such as Citigroup and Bank of America were not as big as some had feared.

The bank rally occurred as news of the capital needs of the 19 banks involved in the tests leaked out during the day, ahead of the official release of the results on Thursday.

Citi, BofA and Morgan Stanley were among the big names that will have to raise equity following the completion of the tests, while JPMorgan Chase, Goldman Sachs and American Express are among those that will not need additional capital, people familiar with the situation said.

Citi and BofA emerged as the banks with the biggest capital shortfalls, with Citi’s equity needs projected to be more than $50bn and BofA requiring about $34bn in fresh equity.

However, BofA’s capital deficit is more pressing because Citi has already agreed to bolster its balance sheet by converting preferred shares owned by the government and other investors and selling non-core businesses.