Still, bank stocks jumped in Thursday's action as other details of the CAP and stress test provided short-term relief for some investors.
If the stress test concludes that some banks need more capital, the Treasury will buy convertible preferred shares in the institutions. Banks that sold preferred securities to the government as part of last year's Troubled Asset Relief Program can redeem these for the new convertible preferred shares.
If needed, the new securities can be converted into common stock, boosting banks' tangible common equity, a measure of financial strength that's become more important to investors and regulators recently.
The securities have to be converted to common stock after seven years. That will dilute current common shareholders. However, the conversion will happen at a 10% discount to the average closing price for the banks' shares over the 20 trading days ended Feb. 9, 2009.
Shares of many banks facing the stress test have slumped in recent weeks, so these conversions will kick in at a premium to current prices for many institutions, analysts noted on Thursday.
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