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Stress Tests Reveal Some Weakness, But Not as Much as Anticipated.

The results of the bank stress tests are in and, overall, it appears there isn't too much of a need to panic. Although 10 major banks must raise more capital, the general conclusion is that the country's major financial institutions are fairly well capitalized.

The top three banks most in need of funding are Bank of America, which needs $33.9 billion; Wells Fargo, which requires $13.7 billion; and Citigroup, which requires $5.5 billion. Furthermore, a report in Bloomberg suggests that JPMorgan Chase and Goldman Sachs, which both passed the test, demonstrating they will not require more capital, may stand to gain customers and shareholders from their seemingly less well-off competitors.

The Wall Street Journal provides a breakdown of where each of the top 19 banks stand in a graphical format.

Reactions in the industry to the stress tests were somewhat mixed. The Financial Services Roundtable (Washington, D.C.) issued a statement in which it reminded people that these tests were not an illustration of the health of individual financial firms, but, instead, focused on their need to raise additional capital under a future worst-case scenario.

According to a statement: "The stress test serves as a road map to increasing future capital, which can be accomplished either independently, or through additional government funding; options for raising that capital can include selling assets, new equity offerings, and converting preferred shares to common. We believe that the stress test results serve to stabilize the public's trust in our industry."

The ABA's president and CEO Edward Yingling noted in a release, "The results of the stress tests should put to rest the harmful speculation we have seen over the past few months. ... It should also be emphasized that it is highly likely that the government is going to not only have its overall investment repaid, it is going to make a significant profit. ... Stress tests are nothing new. What's new about the current tests is the public discussion of the tests, the simultaneous testing of the largest banks in the country, and the requirement of a buffer over the well capitalized standard."

Meanwhile, William Isaac, former chairman of the FDIC, and now chairman of consulting firm LECG Global Financial Services (Washington, D.C.), was not too thrilled with the publicity and politicking around the government-mandated stress tests. Like Yingling, he also noted that banks have always performed some form of stress tests on themselves and that the independent banking agencies must regain regulatory authority so the industry can continue to recover.

According to Isaac: "Perhaps the worst aspect of the financial crisis is that the politicians have seized control of the regulation of banks. Bank regulation and crisis management is being dictated by the Treasury and the White House instead of the independent banking agencies established for that purpose. No good can come of this." He continued: "Political intervention leads to blunders like playing out bank supervision in the public arena. Apparently our collective memory doesn't stretch back two decades to when intervention by the Administration and Congress played a major role in creating the S&L debacle, which cost taxpayers $150 billion."

Further, Gordon Burnes, a VP with risk management solutions provider OpenPages (Waltham, Mass.), feels that although the basic information revealed in the stress test is sound, he agrees with Warren Buffet in that what really should have been examined is the strength of banks' business models in identifying and managing risk in the future. In a blog, Burnes wrote:

"This question of the viability of the business model going forward is an interesting one, and an important aspect of any ongoing business model would be how the risk management procedures will change to avoid similar problems in the future. Raising capital or creating a bad bank or any of the other strategies to deal with toxic assets don't address the fundamental risk management weakness that got us into this mess in the first place."

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