Declaring a strong preference for private ownership of U.S. banks, the nation’s banking regulators said that on February 25 they will launch a Capital Assistance Program that would provide a government buffer if banks fail “stress tests” to gauge the health of their balance sheets and can’t raise private-sector capital.
With anxieties mounting that the government was seeking to nationalize the banks, the regulators issued a statement that declared: “Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.”
Rather than support the solvency of the banks, which the regulators called “well capitalized,” the plan is to get them lending again, according to a statement issued today the Treasury Department, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve.
Monday’s statement followed Treasury Secretary Timothy Geithner’s Feburary 10 description of CAP as part of his outline of the government’s overall Financial Stability Plan, an outline that drew widespread criticism for its perceived lack of details. Today’s statement, while adding the new information of a launch date, did not specify the dollar amount of the program.
The regulators said today that under CAP’s first order of business, “the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment.” Two weeks earlier, they described such stress tests as special, forward-looking assessments administered by bank regulatory supervisors to assess “the losses that could occur across a range of economic scenarios, including conditions more severe than currently anticipated or than are typically used in the capital planning process.”
If the tests show that an added “capital buffer” is needed, the banks would have a chance to go to private capital markets, according to today’s statement. If that doesn’t work, “the temporary capital buffer will be made available from the government,” the rulemakers said.
Under the new program, the government capital will consist of an investment in mandatory convertible preferred shares that they can convert into common stock only if they need to in order to remain “in a well-capitalized position,” the regulators said. The preferred shares “can be retired under improved financial conditions before the conversion becomes mandatory,” they added.
Banks holding government capital injected under the Troubled Asset Relief Program will be able to exchange it for the mandatory convertible preferred shares. “The conversion feature will enable institutions to maintain or enhance the quality of their capital,” according to the statement.
The regulators also pointed out that setting up the CAP buffer “does not imply a new capital standard [for the banks] and it is not expected to be maintained on an ongoing basis.”
Rather, by injecting the capital, they aim “to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.”