Half of US banks may need to raise cash

More than half the giant banks being "stress-tested" by the US Government could be required to raise additional money to recapitalise the nation's financial system, survive a long recession and boost lending that will kickstart the economy.

With the results of the tests due to be published tomorrow, officials are continuing their final discussions with the 19 institutions. Several are believed to have argued the Treasury out of its original demands, but about 10 still expect to be told to raise money.

Ben Bernanke, the chairman of the Federal Reserve, one of the regulators working with the Treasury on the tests, said yesterday that repairing the banking system was vital if the early signs of economic recovery were not to be snuffed out.

Details of how the Treasury is calculating the requirement for a new "capital cushion" for the biggest banks have not been made public, leading to wild speculation on Wall St, and the likely size of any fundraisings is also not clear. Some institutions' needs could run into many billions of dollars.

Three of the nation's four biggest banks by assets - Citigroup, Bank of America and Wells Fargo - are on the list of institutions originally told to shore up their balance sheet, according to leaks. Analysts also expect some regional banks to have to fill holes which may open up in their accounts if business loans and mortgages go bad in a prolonged recession.

The Obama Administration introduced the tests in February as one part of its plan to repair confidence in the banking system. Other initiatives included public loans to private business to revitalise the securitisation market and buy up toxic assets from distressed banks, plus relief for homeowners facing foreclosure.

The tests are designed to forecast banks' likely financial results and capital positions under a long recession.

Bank executives and employees have criticised the methodology, while bearish economic forecasters have said they are not tough enough and are designed to protect the biggest banks from nationalisation.

The Government says that banks will have six months to raise private capital but, if they cannot, then they must take US taxpayer money.

That could make the Government one of the largest shareholders in the largest banks.

Bank shares have surged as the results of the tests draw nearer, suggesting optimism among investors that the health of the financial system may not be as dire as predicted.

- INDEPENDENT