INSTANT VIEW: Fed looking for substantial capital buffers

NEW YORK (Reuters) - The top 19 U.S. banks need to hold a "substantial" amount of capital above regulatory requirements to weather a potential worsening of the economic recession, the U.S. Federal Reserve said on Friday.

Supervisors said "stress tests" regulators conducted at major banks were aimed at ensuring the institutions have enough capital in reserve to continue to lend in potentially bleaker conditions, and are not to be considered a measure of banks' current solvency.

The following is reaction from industry analysts and investors:

DANIEL ALPERT, MANAGING DIRECTOR, WESTWOOD CAPITAL, NEW YORK

"This document is so thin, it's ridiculous. It may be in the last few days, Treasury has determined that it doesn't serve their interests to be more detailed until they have all the numbers done.

"What's interesting is that they acknowledge that since February, the economy has deteriorated. Why would you mention that, unless you want to signal that they're recognizing the deterioration and being tough.

"The economic forecasts are not that important. What's important is the assumed magnitude of potential losses for different assets. That hasn't been revealed."

CARL BIRKELBACH, HEAD OF BIRKELBACH MANAGEMENT IN CHICAGO

"The only thing that can come out of the tests is something bad. There's no question that according to the rules no one fail them, but there are those that could get some warnings and could announce that they're under stress. That's another shoe to fall that's going to come up in the next week or two, since investors are acting as though all the negatives in the economy are over. Morgan Stanley's results were an indication was that not everyone's earnings are going to be good. There's still some negativity that has to be discounted. This first quarter is going to show some disappointing results that haven't been discounted.

"Despite that, it doesn't look like there's much to be afraid of with the stress test in terms of the market. It isn't a fail or pass test. Some may get some negative comments, and that could hurt them, but if they're in trouble then they get more money. Imagine if school was like that-- you got an F, so here's more work so you can get an A.

"We've got a long way to go before all the problems are gone. The market does react in advance of that. I think the recent rally was a leap of faith, and I think that leap was overdone. Reality will check that overenthusiasm. Then, any setback will be used as a buying opportunity, but this is the first time I've been able to say that in a while, that pullbacks could be used as buying opportunities. I couldn't say that a year ago."

BILL STRAZULLO, PARTNER AND CHIEF INVESTMENT STRATEGIST AT BELL CURVE TRADING IN BOSTON

"I think we are way from the financials being out of the woods. Regardless of what they (the stress tests) show, if you say to me financials have turned the corner I'd say OK lets take the training wheels off. We've given them billions of dollars in government handouts; the Fed has steepened the yield curve to the point where they have made the lending environment just about as attractive as possible with zero interest rates -- that's not going to last forever; and you still have this FDIC insurance on the debt issuance to lower their net interest expense. And even with all those crutches they're still in a difficult situation."

WILLIAM LARKIN, PORTFOLIO MANAGER WITH CABOT MONEY MANAGEMENT IN BOSTON:

"It seems like the Fed is looking at a worse case scenario and are trying to be pessimistic in their viewpoint."

"The accounting rules for banks are going to become more stringent and the capital requirements will become more restrictive, which I see as constraining their lending business."

"This means that only the higher qualified institutions and individuals will get access to capital."

"If the government is really stepping in it will be a big negative for bank investors. The market is really looking at how much guidance or control will be implemented by regulatory oversight."

BLAKE HOWELLS, ANALYST, BECKER CAPITAL MANAGEMENT INC, PORTLAND, OREGON

"Everybody will be on pins and needles because it's hard to tell how to react. We have been given a little information, but not all of the data. The banks pass the regulatory capital screens pretty well, but some banks don't have enough tangible common equity.

"Some larger banks may tend to perform better because they have greater proportions of lower-risk-weighted assets.

"Between now and May 4, you'll see a lot of volatility, as investors try to anticipate which banks will perform better, and which will struggle to pass the tests. Intraday volatility will stay elevated until investors have more transparency.

"The concern is that as more information comes to the markets, banks having to raise capital will face more pressure. No one knows how much downside there could be in their stocks, how much capital will be raised, and what form that capital will take. Those are the unknowns.

"I would think stocks are falling because investors were looking for more details about the nature of the tests, and it looks like we didn't get them."

PETER KENNY, MANAGING DIRECTOR AT KNIGHT EQUITY MARKETS IN JERSEY CITY, NEW JERSEY:

"This is about as anti-climatic as it gets. This is not giving us any direction at all. This is very, very basic. You come out of this knowing that the banks have to build up a buffer, (for) a tighter, more challenging credit market. They do that anyway.

"The question also is how dire a situation were the banks tested for in this stress test scenario. It appears as though it wasn't a worst case scenario, but I don't think people feel we have a worst case scenario coming. This was very anti-climatic."

DAVID SLOAN, ECONOMIST, 4CAST LTD, NEW YORK:

"There is really not that much here in the way of surprises. The fact that they say they currently well capitalized, that is really what Geithner said earlier. If Geithner had not said that then the markets might have responded positively, but I don't really think there is that much new here."

(Reporting by Ryan Vlastelica, Ed Krudy, John Parry, Jonathan Stempel, Ellis Mnyandu and Chris Reese)