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Wall Street Sees Burst of Investor Confidence Ahead of Stress Test Results

7 may 2009 - News - Editor

While the much-awaited bank "stress test" results are only due out after close of business on Thursday, investors have been responding with zeal to speculation, rumors and leaked information since markets opened on Monday morning. Despite the fact that most of the "information" doing the rounds indicates that anywhere between ten and fourteen of the banks being scrutinized are likely to be instructed by the government to raise capital, shares of all nineteen participants jumped on Monday. At least a dozen increased by more than 10 percent, with even the worst performer, Morgan Stanley, gaining 4.7 percent.

With uncertainty as to exactly what the stress test aimed to achieve and what the criteria for passing or failing would be based on, there have been some rumblings of discontent among stock market traders and analysts as to the transparency of the stress test. What has become clear in recent days is that banks needing more capital will be obliged to present regulators with a comprehensive fund-raising plan, and they will have a month to do this in. Upon approval of the plan, the banks will have six months in which to raise the funds. Banks needing assistance will also have a month in which to review their board and management team, bearing in mind that anyone in a position of authority must have the expertise to efficiently manage the type of risks that may present themselves in the current economic turmoil.

The bank stress test was unveiled in February this year, and since then Wall Street has been waiting in eager anticipation for the results, which were originally due on Monday of this week. While banks reportedly received their results earlier in the week, the date for release of the results to the public was shifted to close of trade on Thursday in order to give the banks time to mull over their individual results and no doubt prepare responses to questions that may be raised by interested parties.

While the rally on Wall Street is encouraging, does this burst of investor confidence mean that the worst is over for banks? This is a question with a multitude of answers, sparking vigorous debate, but with hindsight being the only perfect science it is a question that will have to wait to be answered in the months ahead.

 


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