Spdr Msci Europe Communi... (EU:STT)
Historical Stock Chart

From Jul 2019 to Jul 2024

After the results of the Treasury Department's stress test of the U.S.'s largest banks are released Thursday evening, the market will begin to guess what the results mean for the smaller banks that weren't tested.

Seven of 19 largest banks will need to raise at last $65 billion more capital, according to reporting by The Wall Street Journal. Several analysts think capital raising at the big banks means the smaller ones will need to raise more capital as well.

"As these banks undergo their normal regulatory exams, the metrics used in the stress tests of the top 19 banks will likely be used," analysts at RBC Capital wrote in a research note.

Shares in the KBW Bank Index rose 5.9% in Thursday morning trading, with shares of most of the 19 banks in the stress test up, including Bank of America Corp. (BAC), which was up 14.6% to $14.54 in recent trading; Capital One Financial Corp. (COF) up 18.6% to $26.50; and Fifth Third Bancorp (FITB), up 22.4% to $6.46.

The RBC Capital analysts extrapolated their assumptions about the government stress tests to the top 100 banks, and identified dozens of those that it believes will have to raise capital over the next 12 months in order to meet the standard set by the stress tests.

The government said in a statement Wednesday night that it had no intention of expanding the stress test beyond the 19 largest banks. It also said that "smaller financial institutions generally maintain capital levels, especially common equity, well above regulatory capital standards."

Fox-Pitt analyst David Trone said he was "very surprised" by the regulators' stance on the smaller banks.

"This suggests that the stress test was more for confidence," Trone said, "since some of the biggest problem banks reside in the mid- and smaller-bank segment, although their names aren't nationally known and therefore any failures won't create a panic against the national banking system."

Rochdale Securities banking analyst Dick Bove said in a recent note that the stress test could have a dire effect on smaller banks.

"The application of the stress test to these companies could conceivably drive at least 150 of them out of business quickly," Bove wrote. "The FDIC would then be forced to create a series of new banks across the country. The new regional banks would be composed of the failed institutions."

Bove said the failure of the smaller banks would then hurt the overall economy by further contracting the supply of available credit.

-By Ed Welsch, Dow Jones Newswires; 201-938-5244; edward.welsch@dowjones.com