US Bank Stress Test Results – Follows Pareto Law

The much awaited “stress-test” results done for the 19 largest US Banks have found that 10 of the 19 banks need a total of about $75 billion in new capital to withstand losses if the recession worsened.

Bank of America needs $33.9 bn, Wells Fargo needs $13.7 bn and GMAC needs $11.5 bn. So these 3 banks (15% of 19) account for 78% of the capital gap. This is a classic case of Pareto law where we can see the 80/20 formation. 20% of the banks have 80% of the capital gaps.

Other banks like Citi and Morgan Stanley have smaller gaps in the  range of $1-5 bn, and many banks like Morgan Stanley are already planning to raise new capital through new stock issue.But the problem is the current capital market is not too keen to buy these banking stocks, so its a challenge even to sell/place $1 bn of banking stock today.

Overall, the stress test results can be seen as positive, as the capital gaps are not too large and not too wide spread.  It looks manageable.