As a result of the current financial crisis, some 305 banks have been characterized as “troubled,” according to the Federal Deposit Insurance Corp. (FDIC). So far this year, about 36 federally insured institutions have failed and been shut down by regulators, continuing a wave of collapse that began in 2008. The FDIC estimates the existing bank failures will cost the deposit insurance fund around $70 billion through 2013 and that another $599 billion could be lost unless regulators take action.

In reaction, the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC recently conducted a comprehensive, forward-looking assessment of the financial conditions of the nation’s 19 largest bank holding companies (BHCs).

More than 150 examiners, economists, accountants, and other specialists were involved in the Supervisory Capital Assessment Program (SCAP) study, which was completed on May 7. The SCAP is a complement to the Treasury’s Capital Assistance Program, which makes capital available to financial institutions as a bridge to private capital in the future.

The goal was to determine capital buffers sufficient for the BHCs to withstand losses and sustain lending in the event that the economic downturn is more severe than is currently anticipated.

Each participating BHC was instructed to estimate potential losses on its loan, investment securities and trading portfolios, including off-balance-sheet commitments and contingent liabilities and exposures over the two-year horizon, beginning with year-end 2008 financial statement data. For loans, the banks were instructed to estimate forward-looking, undiscounted credit losses rather than discounts related to mark-to-market values. To guide estimation, the banks were provided with a common set of indicative loss-rate ranges for specific loan categories in a baseline and a more adverse economic scenario.

In a detailed summary of the study, the supervisors identified potential losses, resources available to absorb losses, and capital-buffer requirements.

The targeted 19 BHCs (each with at least $100 billion in assets and labeled “too big to fail”) represent some 66% of the assets and more than 50% of the loans in the U.S. banking system. According to the study, roughly half the firms should “enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress.”

The study concluded that nine banks (including JPMorgan Chase & Co. and The Goldman Sachs Group) have enough capital to withstand a deeper recession. The remaining 10 must raise a total of $75 billion in new capital (possibly through asset or equity sales) to withstand possible future losses. Specifically, Bank of America Corp. needs $33.9 billion; Wells Fargo & Co. needs $13.7 billion (and plans to issue a $6-billion stock offer); Citigroup Inc. needs $5.5 billion; and Morgan Stanley, $1.8 billion (and plans to sell $2 billion in stock and $3 billion of debt). The other five banks—Regions Financial Corp., SunTrust Banks Inc., KeyCorp, Fifth Third Bancorp, and PNC Financial Services Group Inc.—are regional.

The study’s conclusion included a number of caveats. First, the estimates reported are those of the appointed team of supervisors, and may or may not line up with what the BHCs themselves might have produced, even using a similar set of basic assumptions. Second, the estimates are intended to illustrate possible outcomes, and are not meant to be taken as forecasts. Third, the SCAP was a deliberately stringent test. Fourth, the report focused not only on amounts of capital, but also on the composition of capital held by each of the 19 BHCs. And fifth, the SCAP buffer does not represent a new capital standard and is not expected to be maintained on an ongoing basis.