According to a report by Bloomberg, the Fed believes 6 of the 19 banks tested will be needing additional capital and this is more likely to come from a conversion of the government’s preferred shares to common. The six would perhaps include Bank of America, Citigroup, and from Morgan Stanley analysts- SunTrust Banks Inc., KeyCorp, and Regions Financial Corp. Fifth Third Bancorp, with its exposure to commercial real estate loans might be another.
While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said.
With regulators putting an emphasis on common equity in their stress tests, converting privately held preferred shares is another option.
Firms that receive exceptional assistance could face stiffer government controls, including the firing of executives or board members, the Treasury chief has warned.
Then again, is it simply a matter of benchmark ratios? Or really a need for NEW capital? Because if it was the former, then preferred to common conversion is no problem. But if it’s the latter, it doesn’t make much difference.