By Billy Fisher

Contributor, Stock Traders Daily -  Rule-Based Trading Strategies

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(La Jolla CA)  The Federal Reserve’s decision to limit the amount of future revenue that banks can use to fill the capital holes that were revealed from stress test results could result in several banks pushing to alter their capital raising plans.

The Wall Street Journal has reported that Bank of America (NYSE: BAC – Free Trading Report) is among the prominent names that will need to tap other sources in order to raise billions of dollars in capital to satisfy the Fed. Wells Fargo (NYSE: WFC – Free Trading Report) has been mentioned as another bank that will likely need to do the same and PNC Financial Services Group (NYSE: PNC – Free Trading Report) may also find itself in a similar situation.

These banks face a June 8^th deadline to win government approval for their capital-raising plans that are intended to meet the stress test demands. The notion that the amount of future revenue that can be used to meet these demands will be limited is only ramping up the tension between the big banks and the government.  

The Fed’s decision will only allow for 5% of capital shortfalls to be filled by projected future earnings. Some of the banks that had been subjected to the stress test were hoping that up to 20% of their shortfalls could be filled via future revenue.

This clarification by the Fed is driving some of these companies to turn to stock conversions and secondary offerings. Bank of America for example has indicated that it plans to rely upon a preferred-to-common stock conversion. PNC on the other hand turned to an equity offering to fill its capital needs.

The Fed’s decision on the reliance upon future revenue has not altered the approach of all of the banks that have found themselves in a capital shortfall position. One such example is SunTrust Banks (NYSE: STI – Free Trading Report). It has been reported that the company has already marked $1.5 billion of its $2.2 billion gap and will proceed as previously planned. Regions Financial (NYSE: RF – Free Trading Report) is another institution that has been reported to be unaffected by the Fed’s position.

The stress test process has constantly been evolving since its initial formation making it difficult to predict the precise implications that will ultimately be in store for many of these banks. The June 8^th deadline will hopefully give the market a clearer picture of where each of these institutions stand from a capital standpoint. 

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