When the Treasury Department releases findings of its "stress test" for 19 of the nation's leading banks on May 4, one analyst is confident the numbers will not look good.
And it isn't just banks that are feeling the stress of struggling portfolios. The same analyst is projecting that the numbers for many corporate and natural-person credit unions remain similarly bleak.
Among the options being proposed by Mike Moebs, CEO of Moebs $services: a reworked standard for minimum capital for financial institutions that would lower acceptable capital to 3%.Moebs' conclusions are based on what he believes is the only analysis that incorporates all the nation's banks, savings banks, and credit unions. Moebs $ervices has maintained
for more than 25 years what it said is statistically valid data bases of prices, expenses, and financial information on all banks and credit unions.
"Our stress test is very unique," Moebs said. "We have not been able to find one source that has put all of these institutions together under one lens."
Moebs' stress test analyzes financials' call report data through year-end 2008. When results are scrutinized, he explained, the largest banks are in much worse shape than what many people may believe.
"From what we have been seeing in the general press, no one has been talking about this," Moebs said. "I think things are worse than what we are being told, even for the stress test group of 19."
Moebs' test examines 16,000 financial institutions, reviewing numerous categories, including net interest margin, loan reserves, capital, investment portfolio and the entire loan portfolio. Moebs' initial run of the test for Credit Union Journal applied an 8% minimum capital standard to financials, and in doing so 967 institutions did not meet that minimum
capital requirement, Moebs revealed. "Based on our analysis it's going to require $43 billion to raise them up to 8%," Moebs said. Of that group, 447 are banks, needing $24 billion; 520 are credit unions and corporates, requiring $19 billion to meet the 8% capital minimum, Moebs said.
That's the good news, since Moebs initially stress-tested financial institutions by plugging in a 100-cents-on-the-dollar value for investment portfolios, real estate, consumer, and commercial loan portfolios.
A More Realistic View
Taking a more realistic view of the portfolios, Moebs then reduced the value of mortgage-backed securities to 70%, real estate portfolios to 80%, consumer loans to 90%, and commercial loans to 80%, respectively.
Running the test with those adjustments significantly altered the continuing bailout picture-even with dropping the minimum capital standard to 6%, Moebs showed Credit Union Journal. "In this scenario, of the 16,000 institutions, over half cannot meet the 6% minimum capital standard," he said.
The breakdown: Approximately 3,900 credit unions fall below the 6% standard, needing billions to bring them up to par.
"So we have $83 billion in assistance needed for credit unions," Moebs shared.
Just under 5,800 banks would need shoring up. "A great deal of the problems are concentrated in some of the very largest banks," Moebs said, adding part of their problem is they are "well beyond their economies of scale." Moebs based his assertion on the mega-banks' non-interest expenses. "The average for this group is 338 basis points-more than the
community banks and only 18% less than all 8,000 credit unions. These guys are so inefficient."
The way out of the mess, offered Moebs, is by defining capital to allow debt especially for community banks and credit unions and by reworking how regulators address minimum capital standards for financial institutions. Citing a similar move made by Japanese regulators, Moebs recommended lowering acceptable capital to 3%. Financials with capital going to
3% would be required to develop a two- to three-year plan to bring their capital back to 6% to 8%.
The most significant move that could be done by the government would be for the FDIC and NCUA, backed in both cases by the Fed, to guarantee debt that would be included in the calculation of capital. This would allow all banks and credit unions to seek private backing through investors. "Not one single cent of taxpayer money would have to be used if capital
is redefined and guarantees from the government offered," said Moebs.