NEW YORK (MarketWatch) -- Most of the largest U.S. banks will have enough capital to withstand an unemployment rate of 10%, but their viability without more capital-raising is questionable above that level, according to a "stress test" of several large banks released Wednesday by FBR Capital Markets.
Several bank executives have said they believe the unemployment rate will peak around 10%, and in the "adverse" scenario - outlined in the U.S. Treasury Department's stress test - unemployment crests at just above that level.
But FBR Capital analyst Paul Miller, who authored FBR's report on stress tests, believes the banks and government's expectations are overly optimistic. In the firm's survey of 62 buy-side firms, about 80% think the unemployment rate will peak between 10% and 12% and about half expect the peak to come as late as the second or third quarter of 2010.
The unemployment rate is highly related to banks' loss levels, as people stop paying their debts when they lose their jobs.
At 12% unemployment, FBR's stress test found that the level of most large banks' tangible common equity - the most conservative measure of banks' capital - falls below 3% of their risk-weighed assets and, in some cases, is exhausted completely. Three percent is seen as a minimum acceptable level of tangible common equity, and the government has indicated they will require banks to maintain that level.
http://www.marketwatch.com/news/sto...3D-4056-BBE1-215E68681307}&dist=TQP_Mod_mktwN
Several bank executives have said they believe the unemployment rate will peak around 10%, and in the "adverse" scenario - outlined in the U.S. Treasury Department's stress test - unemployment crests at just above that level.
But FBR Capital analyst Paul Miller, who authored FBR's report on stress tests, believes the banks and government's expectations are overly optimistic. In the firm's survey of 62 buy-side firms, about 80% think the unemployment rate will peak between 10% and 12% and about half expect the peak to come as late as the second or third quarter of 2010.
The unemployment rate is highly related to banks' loss levels, as people stop paying their debts when they lose their jobs.
At 12% unemployment, FBR's stress test found that the level of most large banks' tangible common equity - the most conservative measure of banks' capital - falls below 3% of their risk-weighed assets and, in some cases, is exhausted completely. Three percent is seen as a minimum acceptable level of tangible common equity, and the government has indicated they will require banks to maintain that level.
http://www.marketwatch.com/news/sto...3D-4056-BBE1-215E68681307}&dist=TQP_Mod_mktwN