WASHINGTON — Ten of the nation's largest financial firms need to raise $75 billion more to withstand the losses that would come with a deeper recession, the government said Thursday in a report card that found the banking system viable but still vulnerable.
The Federal Reserve, issuing the long-awaited results of its "stress tests" for banks, found nine of the firms are stable enough that they need no additional capital.
Among the 10 banks that need to raise more capital, Bank of America Corp. needs by far the most _ $33.9 billion. Wells Fargo & Co. needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. $5.5 billion and Morgan Stanley $1.8 billion.
The banks will have until June 8 to develop a plan and have it approved by their regulators. If they can't raise the money on their own, the government said it's prepared to dip further into its bailout fund.
The stress tests are a big part of the Obama administration's plan to fortify the financial system in the wake of last fall's credit crisis. As home prices fell and foreclosures increased, banks took huge hits on mortgages and mortgage-related securities they were holding.
Last fall, the government approved $700 billion to bail out banks and embarked on a series of historic government rescues, including the takeovers of mortgage finance giants Fannie Mae and Freddie Mac and insurer American International Group Inc.
The government hopes the stress tests will restore investors' confidence that not all banks are weak, and that even those that are can be strengthened. They have said none of the banks will be allowed to fail.
The five other firms found to need more of a capital cushion are all regional banks _ Regions Financial Corp. of Birmingham, Ala.; SunTrust Banks Inc. of Atlanta; KeyCorp of Cleveland; Fifth Third Bancorp of Cincinnati; and PNC Financial Services Group Inc. of Pittsburgh.
Among the banks that the government did not ask to raise more capital were JPMorgan Chase & Co., brokerage house Goldman Sachs Group Inc., insurer MetLife Inc. and credit card companies Capital One Financial Corp. and American Express Co.
Together, the 19 firms that took the test hold two-thirds of the assets and half the loans in the U.S. banking system.
Some of the firms that need more capital were quick to announce strategies for how to get it. Wells Fargo & Co. and Morgan Stanley announced they were selling stock, and Citigroup Inc. said it would convert preferred shares _ a form of debt _ into common stock.
The tests found that if the recession were to worsen, losses at the 19 stress-tested firms during 2009 and 2010 could total $600 billion. Of those losses, $185.5 billion would be from mortgages, $82.4 billion from credit card loans and $53 billion from commercial real estate loans _ the loans on banks' books that analysts say are now most vulnerable to default.
"Looking at the big picture, you can say that things aren't so bad for the financial industry as a whole," said Kevin Logan, chief U.S. economist at Dresdner Kleinwort.
But Logan said attracting fresh capital will be a challenge for banks that need it.
"The banking industry is not going to make a lot of money going forward, and that's a dilemma for keeping banks solvent and getting them lending," he said.
Large and regional bank stocks mostly rallied in after-hours trading as investors showed relief over the results. Bank of America Corp. rose 9.2 percent to $14.75, while JPMorgan Chase & Co. gained 1.5 percent to $35.77. Fifth Third Bancorp advanced 23.4 percent to $6.60, while Boston's State Street Corp. jumped to $40.90, a gain of 8.1 percent.
The government's unprecedented decision to publicly release bank exams has led some critics to question whether the findings are credible. Some said regulators seemed so intent on sustaining public confidence in the banks that the results would have to find the banks basically healthy, even if some need to raise more capital.
Jaidev Iyer, a former risk management chief at Citigroup, said regulators are playing to public expectations, which could put the government in the role of creating "winners and losers." Because the government has said it won't let any firm fold, taxpayers may wind up on the hook.
"If there is in fact no appetite to let losers fail, then the real losers are the market at large, the government and the taxpayers," Iyer said.
In the tests, the Fed put banks through a scenario that imagines the recession would worsen: that joblessness would hit 10.3 percent next year and house prices would fall more than 22 percent.
Some analysts have questioned whether the tests were rigorous enough. For example, economists expect the jobless rate to approach or exceed 10 percent by year's end _ and to go higher next year _ even if the recession doesn't worsen.
A steeper downturn would make it harder for consumers and businesses to repay loans, which would cause banks' assets to lose value. The government is forcing the banks to keep their capital reserves up so they can keep lending even if the economic picture darkens.
The tests measured bank reserves based on what's known as common equity, the value of a company's common stock and profits. Some of the banks have big enough reserves by traditional measures but fall short by this narrower standard.
"It's not really stressful, so how could it be a stress test?" said Simon Johnson, a former chief economist with the International Monetary Fund and professor at the Massachusetts Institute of Technology. "This makes it seem like we're not having a financial crisis at all."
Johnson said some bank executives have told him they already are losing more money on commercial real estate loans than the tests estimated even under the harsher economic scenario.
The stock market has cheered the results, he said, because the message is that the government will continue supporting the banks no matter what it costs.
Another criticism of the stress tests is that they did not address a key problem confronting banks: The troubled mortgage assets on their books are making it hard for them to resume normal lending.
Banks that need capital have several options. Some would be able to close the gap by converting the government's debt into common stock.
"These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario," said Treasury Secretary Timothy Geithner. "They will provide the transparency necessary for individuals and markets to judge the strength of the banking system."
Describing the purpose of the tests, Federal Reserve Chairman Ben Bernanke said at a news conference with Geithner, "This is to make sure banks have enough capital to offset the losses we know are coming in the next couple of years."
AP Economics Writer Martin Crutsinger, AP Business Writer Ieva M. Augstums in Charlotte, N.C., and AP Business Writers Stevenson Jacobs, Sara Lepro, Madlen Read and Candice Choi in New York contributed to this report.