Source: NYtimes.com

The Federal Reserve had a nasty surprise for the financial markets right before the Halloween weekend (the perfect timing to sweep something under the carpet and hoping the markets will have forgotten about it by Monday). At 8PM on Friday night (again, perfect timing, the Fed made sure all Bloomberg terminals were switched off and the average Wall Street trader was already spending his salary in a fancy Manhattan bar), a statement was issued, confirming the major banks in the USA would need an additional capital injection of $120B to secure the safety of the financial system and to get rid of the capital shortfall.

The governors of the Federal Reserve have confirmed and approved a draft version of the proposal, and it will now be made available for public comments. The remarkable part of the proposal is the fact the council of governors is proposing to fill the gap by raising additional debt, instead of issuing new shares to increase the equity level on the banks’ balance sheets.

Source: opengov.com

The six major banks will be hit by this new proposal, and it’s widely expected JP Morgan and Citigroup will have the hardest task to comply with the Fed’s requirements. So okay, if the $120B could be covered by new (probably subordinated) debt issues, the damage could be limited to the banks just paying a few billions in interest expenses per year. Nothing to lose your sleep over.

However, what’s really disturbing here is that these same banks, 6 years after the global financial crisis, are still facing shortcomings on the balance sheet front. Despite the government and the Federal Reserve claiming that the ‘crisis is over’ and the American economy is ‘healthy again’, apparently the banks would still have difficulties to deal with any decent-sized economic crisis.

But wait, that’s not all. On Friday, the European Central Bank also announced the results of a review of the situation of the Greek banks in the Euro-system. Apparently, there still is a huge hole in the Greek financial sector (surprise, surprise), and the Greek banks would need an additional capital injection of in excess of $15B , just to survive any adverse economic scenario in the country.