Stress tests watched as key to turnaround sought

The much-anticipated stress test of top U.S. banks shows some of the largest banks need to raise capital. Regional banks look riskier than the big ones, because they carry the bulk of mortgages and credit-card loans.

Stress tests have been conducted in recent months on 19 of the country's largest banks – to see if they could survive a further economic downturn, and estimating the fresh capital they need.

Unemployment is a key factor. The number of Americans out of work is currently 8.5%. Should it exceed 10%, the number of non-performing loans would also increase, which would put additional strain on the banking system.

Analysts like Sergey Guriev, Rector, at the New Economic School in Moscow, say capital for banks under stress is likely to come from private-public partnerships, and that partial government ownership of several institutions is not likely to be long-term.

“I think nationalization of American banks is not acceptable to the public and in that sense it is a temporary solution. If the private-public partnerships fail to raise the funds needed for recapitalization of banks or buying out bad assets from the balance sheets, that's a high-probability event, and Obama will have to go back to Congress and ask for more money.”

The IMF thinks U.S. banks will require additional capital of between $275 billion and $500 billion, depending on leverage requirements from regulators. Some rating organizations think it could even be up to $700 billion.

The results of the bank tests is being watched around the world according to Daniel Klein, Partner at Hellevig, Klein, Usov Llc, in Moscow.

“I think there will be a ripple effect. As the U.S. government injects money into the U.S. banking system, banking stocks and shares will rise, confidence will rise. Banks will start lending more to other banks. It will built up consumer confidence and eventually help the economy recover.”

Federal Reserve Chairman Ben Bernanke has said the lessons learned could serve as a guide for improvements in financial regulation and oversight.