Bank Stress Tests Revealed: Citi and Bank of America Should Pass

Well they finally revealed what the "stress test" of the banks is supposed to involve. I'm pretty sure that most of the 19 large banks should be able pass this test failry easily.

The "baseline" scenario envisions the nation's gross domestic product, which is the value of all goods and services produced within the U.S., falling 2 percent this year, unemployment rising to 8.4 percent and home prices dropping 14 percent.

The "adverse" scenario assumes GDP will drop 3.3 percent, unemployment rising to 8.9 percent and home prices falling 22 percent this year.

The stress tests will consider a typical regulatory measure of a bank's capital reserves, known as "Tier 1 capital," government officials said, but will emphasize tangible items such as shareholders' equity. Investors no longer trust Tier 1 capital, analysts have said, because it includes intangible assets such as operating losses that can be used to reduce future tax liabilities.

The minimum Tier 1 capital ratio that regulators need is 4% and they need a 6% ratio to be known as "well-capitalized."

So Bank of America which has a 9.15% Tier 1 Capital and Citi has a supposed 11.9% Tier 1 Capital ratio may fly right through this test with no problems. What this means is Bank of America and Citi might not be forced to take TARP 2 money and pay that onerous 9% dividend on that special preferred stock.