The Bank-stock Market Virtuous Cycle

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THE STASH MAY 12, 2009

The Bank-stock Market Virtuous Cycle

The Journal has an interesting piece today about how the largely successful U.S. stress tests are prompting Europeans to worry that they haven't scrutinized their own banks closely enough. It's also worth highlighting this aside about how the rising stock market makes the whole stress-test exercise much, much easier: 

Unlike in the U.S., there has been no major policy initiative to force banks in Europe to increase capital cushions, and governments have intervened only on a piecemeal basis. Meanwhile, as U.S. banks pile in with efforts to raise capital from investors, European banks aren't taking advantage of a stock rally to do the same.

Obviously raising the $75 billion the government wants the stress-tested banks to raise isn't nearly as hard as raising $200 billion or $500 billion. (Particularly since many of the banks can convert the preferred shares the government owns into common stock if they really have to.) Still, there are certain banks, like Bank of America, Citigroup, GMAC, and Wells Fargo, that have to raise substantial sums of money. And that money would be almost impossible to raise privately if the stock market hadn't rebounded over the last six weeks. (It might still be tough in some cases.)

When we started the stress tests, everyone just assumed the banks that needed more money would have to seek it from the government, since no private investor would want to hand it over to them. We're hardly in the clear yet, but the fact that this prognosis has changed is pretty encouraging.

Update: The Washington Post has a story on the subject today.

--Noam Scheiber

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