MARKETS ACROSS the world rallied yesterday in response to the results of stress tests on the 19 biggest American banks and US jobs figures that suggest the worst of the recession could be over. The US government stress tests found that the banks need to raise $74.6 billion in extra capital to cushion themselves against losses of up to $599 billion by the end of 2010 if the economy performs worse than expected.
Two of the 10 banks identified as needing more capital - Morgan Stanley and Wells Fargo - moved quickly yesterday to start closing the gap by raising $11.5 billion between them.
Regulators led by the Federal Reserve found that nine of the 19 biggest banks, including Goldman Sachs and JP Morgan Chase, do not need more capital. Bank of America has the biggest shortfall of $33.9 billion, followed by Wells Fargo with $13.7 billion.
Banks that need more capital have a month to develop a plan and until six months' time to implement it. "The stress-test results are an important step forward," treasury secretary Timothy Geithner said. "Americans should know that the government stands behind the banking system and that their deposits are safe."
The tests used an "adverse scenario" of a 3.3 per cent contraction in the economy this year, and an average unemployment rate of 8.9 per cent in 2009 and 10.3 percent next year.
Sceptical economists complained yesterday that the tests lacked rigour, the scenarios were too optimistic and that the examiners had caved in to banks' demands to soften the results.
Others warned that, by requiring banks to hoard capital, the federal authorities could make it more difficult for businesses and consumers to get credit. Alabama-based Regions Financial, one of the banks told to raise more capital, said the tests' loss assumptions were unrealistically high and questioned the need for more capital amid signs that the economy was improving.
Mr Geithner defended the methodology and suggested that the publication of the test results would make it easier for banks to raise new equity from private sources.
The pace of job losses in the US slowed in April to 539,000 from well over 600,000 the previous month, although the unemployment rate rose to 8.9 per cent, its highest level in 25 years. President Barack Obama said: "While it's somewhat encouraging that this number is lower than it's been in each of the past six months, it's still a sobering toll.
"It underscores the point that we're still in the midst of a recession that was years in the making and will be months or even years in the unmaking; and we should expect further job losses in the months to come."
The slowdown in the rate of job losses is the latest encouraging sign for the US economy, which Mr Obama welcomed as evidence that the worst could be past. "Although we have a long way to go before we can put this recession behind us, the gears of our economic engine do appear to be slowly turning once again. Consumer spending and home sales are stabilizing; construction spending is up for the first time in six months. So step by step, we're beginning to make progress.
"Of course, that's no solace to those who've lost their jobs, or to the small business owners whose hearts break at letting long-time employees go . . . It's of little comfort to the families who wake up wondering how they're going to pay their bills, stay in their homes, or put food on the table."
