Investors around the world are bracing for a volatile session on Thursday as the European Central Bank meets to decide on interest rates and whether or not it will proceed with quantitative measures, followed later in the day by the announcement of the results of the Stress Tests carried on 19 US banks.
ECB President Jean-Claude Trichet has imposed a vow of silence on the Governing Council, which is divided over how low to cut the benchmark interest rate, currently at 1.25%, and what new tools to use to stem Europe’s worst recession since World War II. The discord forced Trichet to cut rates less than economists expected in April and delay a decision on new measures till May.
Germany’s Axel Weber wants to make 1% the floor for the benchmark and is against buying debt to pump additional money into the economy, while others such as Greece’s George Provopoulos and Athanasios Orphanides of Cyprus don’t want to rule out deeper cuts or the possibility of asset purchases.
Most economists say the ECB will cut its key rate by a quarter point to a record low of 1% this week. The survey also shows the ECB will probably keep it there until the third quarter of 2010.
Stress Tests
The U.S. Federal Reserve plans to deliver results of stress tests on 19 banks after markets close on Thursday with leaked reports suggesting that ten companies need additional capital to weather a deeper recession.
Banks are formulating plans to fill their capital requirements, much of which would likely come from conversions of preferred shares. Many of the 19 lenders under review and the government are set to discuss publicly the examinations.
Last week, the Fed delayed the release of the tests, originally scheduled for Monday, as banks challenged some of the conclusions. Citigroup and Bank of America were among the banks found to need additional capital.
Both firms disputed the Fed’s determination. Bank of America gained 19% after the company denied it was working on a plan to raise $10 bln. Citigroup rose 7.7%.
A source familiar with Citigroup’s plans said the bank wasn’t likely to need new taxpayer cash and was focusing on converting government shares and getting capital from private investors to satisfy regulators.
The number of banks deemed to need more capital has increased from six to eight a week ago, after regulators boosted their target for the reserves the firms must hold.
Officials favour tangible common equity equal of about 4% of a bank’s assets, up from a 3% goal earlier in the process, Bloomberg quoted people familiar with the negotiations.
While banks are trying to avoid the taint of taking federal funds – and the potential pay restrictions and executive firings that come with it – the government will also benefit by handing out less cash. Not including repayments, the Treasury has about $110 bln left in the $700 bln Troubled Asset Relief Program that Congress passed last October.
Lawmakers have repeatedly said they won’t approve any more funds. Some lenders, including Goldman Sachs, have said they intend to pay back as soon as possible the TARP money they received last year.
President Barack Obama’s spokesman said that some banks will “undoubtedly” need more capital, but the administration expects them to be able to get it in private markets.
The 19 firms include Citigroup, Bank of America, Wells Fargo, Goldman Sachs, GMAC, MetLife, Fifth Third Bancorp and Regions Financial Corp.
