Report: Banks Can Reduce Capital Needs if Profits Higher

From the Financial Times: US banks claim line softened on $74bn (ht Bo)

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said.

The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters.

The banks have 28 days to announce their capital-raising plans and until November 9 to implement them. Wells Fargo and other banks that will have to raise capital told the Financial Times that if operating profits were greater than the government’s stress-case forecast for the second and third quarter, they would receive credit for the difference. That, in turn, would reduce the need to raise fresh equity from other sources.

The banks have a real incentive to book profits during Q2 and Q3 - something to remember.

For more, see the comments of Nouriel Roubini and Jan Hatzius (Goldman's chief economist) that I posted yesterday: The Race: Future Earnings vs. Writedowns