City traders are braced for turmoil in UK financial sector stocks this week, when the Federal Reserve releases results of health checks on 19 US banks on Thursday. At least two big banks are believed to have failed the "stress tests".
The tests form part of the Obama Administration's programme to restore financial stability in the world's largest economy. The results of the tests come out amid the worst economic crisis since the Great Depression of the 1930s.
The International Monetary Fund has forecast global write-downs stemming from the slump will exceed $4 trillion in 2010. The health checks have made investors uneasy and their outcome could weigh on market sentiment in the week ahead.
"Investors are becoming increasingly focused on the bank stress test results," said Bob Doll, vice-chairman and chief investment officer for global equities at BlackRock.
"Despite the Treasury Department's statements that most banks appear to be well capitalised, many investors are concerned about the state of the banking system. We expect that the results, once released, will prompt some additional market volatility."
Deliberations between banks and regulators about the tests' results pushed back the release date, which initially was expected to be today. The delay follows an internal debate among regulators about how best to reveal to markets the health of the biggest banks, information usually reserved for bank examiners.
The details may help investors distinguish strong from weak companies, leav- ing the latter to turn to the government for capital.
A report by a US newswire last week stated that at least six of the 19 biggest institutions will be required by regulators to take additional steps to raise capital levels, and that these firms are likely to convert preferred shares into common stock rather than choosing to accept additional taxpayer funds as part of a government bailout scheme set up after investment Brothers Lehman Brothers collapsed in September of last year.
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