Wednesday, February 25, 2009

U.S. Sets a 6-Month Deadline for New Bank Capital

By Rebecca Christie and Robert Schmidt (Bloomberg):

The government set a six-month deadline for the biggest 19 U.S. banks to raise any new capital deemed necessary after a mandatory review of their balance sheets.

The regulators will complete their so-called stress tests by the end of April, which will identify how much extra cushion each bank will need, the Treasury said today in Washington. Lenders will have six months to raise private capital or accept government funds and the conditions that come with it.

“While the vast majority of U.S. banking organizations have capital in excess of the amounts required to be considered well capitalized, the uncertain economic environment has eroded confidence in the amount and quality of capital held by some,” the Treasury said, announcing guidelines for new bank reviews.

Any new government money will come in the form of convertible preferred securities, which would acquire voting rights if converted into common stock. U.S. officials, speaking to reporters after the announcement, said there would be no limit on how much money the program could provide banks, raising questions whether the Obama administration will need to ask Congress for more bailout funds.

The Treasury has used about half the $700 billion allocated by Congress for the banking rescue, and most was spent under President George W. Bush.

Banks receiving the new money would be pressed to show how they will lend more, officials said.

Capital Assessments

In their assessments, regulators will incorporate off- balance sheet commitments, earnings projections, risks of the banks’ business activities and the composition and quality of their capital, the Treasury said.

Losses will be projected under two economic scenarios. Under the “baseline” scenario, the U.S. economy will shrink 2 percent this year and expand 2.1 percent in 2010. The “alternative more adverse” set of projections has gross domestic product dropping by 3.3 percent this year, with a 0.5 percent expansion in 2010.

Any capital investments made by the Treasury will be placed in a separate trust to manage the government’s investments in financial companies.

If it acquires voting rights, the Treasury said it would release guidelines on how it will handle the situation before completing any transactions. The shares would convert either at a bank’s request or at the end of a seven-year period.

Government Ownership

“U.S. government ownership is not an objective” of the program, the Treasury said. In cases of significant federal investment, “our goal will be to keep the period of government ownership as temporary as possible.”

While the biggest 19 banks will be required to undergo the stress tests and get more capital, smaller banks can also apply to participate in the Treasury initiative, known as the Capital Assistance Program.

Federal Reserve Chairman Ben S. Bernanke said today that while the U.S. government may take “substantial” stakes in Citigroup Inc. and other banks, it doesn’t plan a full-scale nationalization that wipes out stockholders.

Nationalization is when the government “seizes” a company, “zeroes out the shareholders and begins to manage and run the bank, and we don’t plan anything like that,” Bernanke told lawmakers in Washington.

Today’s statement didn’t specify any potential limit on the amount of money involved. President Barack Obama late yesterday signaled that the administration will seek more money from Congress for the effort to break the back of the credit crisis.

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