Sullivan & Cromwell
June 9, 2009

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Alston + Bird
Financial Services and Products Advisory
May 11, 2009

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Skadden
TARP Report
May 7, 2009

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Sidley Austin
May 7, 2009

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Latham & Watkins
May 7, 2009
As you have probably surmised, the question in the title of this Alert is largely rhetorical, with the authors noting that “notwithstanding the supervisors’ statement that the SCAP buffer does not create a new capital standard—the Stress Tests reveal an important shift in approach to the regulatory capital standards applicable to BHCs and their consolidated entities.” In addition to laying out arguments supporting what may be the long-term impact of the Supervisory Capital Assessment Program (SCAP or “stress tests”), the Alert looks at the immediate impact of the Stress Test results announced May 7th. Bottom line: 10 of the 19 banks tested need to add $185 billion in capital buffers in order to reach target SCAP figures (based on the “more adverse scenario” test) at the end of 2010. For a review of the latest batch of “scarlet letters” handed out by the government and the methodology for awarding them see the later half of the Alert, but for many in the banking community as a whole it is Latham’s “moving goal posts” that will be of greater long-term interest.

So how are the capital standards goalposts moving (NB: You may want to start with the overview of existing capital adequacy rules, elements and standards starting on page 3, before delving into the discussion of the possible “new rules” starting on page 2)?

The Alert looks at 5 reasons why the results of the SCAP likely have “significance that goes beyond the specific finding of the stress tests.”

1. The SCAP effectively mandates a new level of capital adequacy for the largest US-based banks;
2. the SCAP [citing the Alert] “reaffirms a regulatory preference for common stockholders’ equity and effectively establishes a ratio of voting common stockholders’ equity to risk weighted assets as a new metric for capital adequacy” (this because of the inherent “loss absorption capacity” of common capital);
3. stress testing and the making public of the results “might become a more frequent occurrence;”
4. stress testing, in addition to becoming more of a norm, may also portend a highly granular, institution-specific approach to the assessment of capital requirements; and
5. given SCAP’s emphasis on the ability of boards and management to manage exposure to losses and capital maintenance, a higher degree of accountability for directors and management.

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Kilpatrick Stockton
February 26, 2009

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Jones Day
March 2009

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Jones Day
March 2009

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