Banks are continuing to respond to the results of the U.S. regulators’ stress tests with moves to raise capital, but that doesn’t mean that the financial crisis is over.

On Thursday, the regulators estimated that 10 key banks must raise about US$75 billion in additional capital within the next six months to ensure that they can weather an adverse economic scenario. The banks have 30 days to come with a plan to meet these requirements, and six months to implement it.

Economic research firm IHS Global Insight says that the adverse economic scenario used to calibrate the stress tests was credible, as it is moderately worse than its baseline scenario, and it finds that the additional capital requirements “are not particularly burdensome”. It predicts that the 10 banks involved should not have major difficulties raising the capital required, and notes that the conversion of the Treasury’s holdings of preferred shares to common shares can be used as a backstop.

Indeed, several firms have already announced plans to raise additional capital. On Friday, Wells Fargo & Co. announced that it priced a US$7.5 billion offering of 341 million shares of its common stock at US$22 per share. The underwriters also have a 51.15 million share over-allotment option. The closing is expected to occur on May 13.

Similarly, Morgan Stanley announced that it will raise US$8 billion. It priced a public offering of 146 million shares of common stock to the public at US$24.00 per share for total gross proceeds of approximately US$3.5 billion, and the firm exercised its over-allotment option to purchase an additional 21.9 million shares, pushing the total common stock deal to US$4 billion. It also priced a public offering of US$4 billion in aggregate principal amount of senior notes.

“The significant demand for our equity and debt offerings is a testament to the power of the Morgan Stanley franchise,” said John Mack, CEO of Morgan Stanley. “As we prepare to close the Smith Barney deal, these successful offerings will allow us to maintain some of the strongest capital levels in the industry.”

However, IHS notes, “While improving bank earnings, plus less downward pressure on the overall economy, has taken pressure off the banking system and alleviated concerns about solvency of major institutions and the U.S. financial system as a whole, credit markets remain under severe pressure and bank credit in the U.S. financial system declined by nearly US$50 billion in first-quarter 2009. Despite all the pump-priming of the Federal Reserve, the credit system is still failing.”

“Thus, while the stress tests reveal a better-than-expected picture of the present and future capitalization of the banking system, and a path for greater financial stability in the future, credit markets are a heck of a long way from functioning normally and in a manner that would be constructive for economic recovery,” it concludes. “This implies that the Federal Reserve will need to maintain maximum forward thrust on monetary policy and its various balance-sheet programs for several more quarters in order to nurse the credit markets back to a recovery mode.”

TD Economics also sees continuing risks on the horizon for the financial system and the economy. “The U.S. stress test scenario is not far off our own base case economic forecast. While the economic data does support our forecast for recovery, this too is contingent on banks being confident enough to expand their balance sheets by issuing loans and taking on more risk,” it notes. “If loan losses are worse than expected, the danger is that credit will remain choked off, forestalling an economic recovery and making it harder, once again, for banks to raise the required capital.”

IE