Fed Outlines Rules for Bailout Repayment

By DANIEL WAGNER

posted: 253 DAYS 14 HOURS AGO

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WASHINGTON (June 1) - The Federal Reserve on Monday laid out rules for banks seeking to repay taxpayer bailout funds, clearing the way for the 19 largest financial institutions to wind down their reliance on government support.

The rules apply to the nation's 19 largest U.S. banks, which have assets of more than $100 billion and were subjected to "stress tests" to determine their financial strength. They have received a total of $228.6 billion from Treasury's $700 billion financial bailout package.

The test results, released last month, showed 10 of the banks had to raise a total of $75 billion in new capital to withstand possible future losses. Those banks have since been scrambling to raise the money through stock offerings and other financial moves. Banks that were not deemed to need more capital and which want to repay bailout funds must prove they can raise money without relying on guarantees against losses provided by the Federal Deposit Insurance Corp.

They also must persuade regulators that they will be able to continue lending to creditworthy borrowers; that they can maintain the minimum capital levels required under the stress tests; and that they will be able to meet funding obligations to business partners while "reducing reliance on government capital" and the FDIC guarantee.

The Fed's announcement is part of an effort to wind down all government support of banks — not just from the Treasury bailout program, but also from other subsidies.

Banks have chafed against rules imposed by Congress after they took the bailout money, including limits on executive compensation. In order to repay the money, banks had to apply to their primary regulators for permission. Successful applications were forwarded to Treasury for final approval, with the first round of approvals expected next week.

J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley, American Express Co. and Bank of New York Mellon Corp. all have applied to repay the more than $50 billion they have received in total.

JPMorgan said Monday it plans to raise $5 billion through a common stock offering as it seeks to repay the $25 billion that the bank was awarded under the government's troubled asset relief program. American Express also said Monday it will sell $500 million in stock in a public offering to help pay back part of the $3.4 billion in TARP funds it has received.

Last month, a handful of larger banks — BB&T, U.S. Bancorp, Capital One Financial Corp. and Bank of New York Mellon — also said they were raising capital in order to repay TARP. They passed the government's stress tests with no capital requirements, so they and other banks with sufficient capital, such as JPMorgan and Goldman Sachs, are likely to get approval soon to return TARP, analysts say.

JPMorgan said Monday it believes that once it raises the $5 billion, it will have satisfied government criteria for fully redeeming TARP's preferred capital, although it hasn't won government approval to repay the full $25 billion. The bank said it expects to satisfy criteria to fully repay preferred capital "before the end of June."

The move to link repayment to less reliance on other subsidies reflects a "quid pro quo" between banks and regulators, said Douglas Elliott, of the Brookings Institution.

The government would prefer that banks keep the extra money to protect against future problems, he said. But it also would prefer to pull back other forms of support from banks that don't need it.

"It would make sense to they would tie the two together and basically say, 'If you want to pay us back, we'll let you, but you've got to show us you're strong enough to not need additional assistance through any of these vehicles."

Elliott pointed out that convincing regulators banks don't need support is far different from operating without that support. He said the banks aren't being asked to pull back FDIC-guaranteed debt from debtholders; just to show they could do so if necessary.

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AP Business Writer Mark Jewell contributed to this report.

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2009-06-01 17:33:51