The United States economy remains vulnerable to structural problems in its financial sector, despite positive market responses to the much anticipated "stress tests" results for US banks.
UNSW international finance expert, Professor Neal Stoughton, says while the "stress tests" give a clearer picture of the state of the banks, there is likely to be more pain ahead for the poorest performing institutions and US taxpayers.
The "stress tests", carried out by US Treasury Department and Federal Reserve officials, found 10 of the 19 largest banks needed a combined US$74.6 billion of extra funds to boost their cash reserves. The US government has already put US$700 billion into the banking system, through the Troubled Asset Relief Program (TARP).
Professor Stoughton, Macquarie Group Chair in Financial Services at UNSW's Australian School of Business, says the positive news is that the existing TARP funds will be sufficient to cover the shortfall, if the banks are unable to raise the capital privately.
However, weaker banks may still be forced to seek further government funds or to sell off parts of their operations; both of which could impose an additional burden on US taxpayers.
"The market reaction says this is more positive than what had been expected at the beginning of the process," says Professor Stoughton.
"But, this does not in any way relieve the economic stresses that have built up and potentially exposes weak banks to a very difficult set of circumstances.
"The whole process ends leaving weak banks in the hands of the government and strong banks in private hands. How will this be unwound?"
While some banks are clearly better off after the exercise, others are worse off and it is not clear the whole system has benefited in aggregate, Professor Stoughton says.
The recent turn around in market sentiment should not be too closely linked to the "stress test" results, he says, but reflects a general improvement in the economic climate and consumer confidence.
More commentary and analysis of the Global Financial Crisis can be found on the Australian School of Business website.
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