Treasury Issues TARP Repayment Rules

Now that the stress tests are over and banks are raising money from the private markets, the next step is TARP repayment.

As we’ve argued, Tim Geithner’s hands on limiting TARP repayment should be tied. Congress passed a provision which basically says that Treasury can’t do much to limit repayment.

Well, the rules are out — obtained by Fox Biz — and though the Treasury acknowledges this limit, they’re still demanding that the banks raise non-FDIC guaranteed. Here’s their explanation:

Under the original terms of the CPP, banks were prohibited from repaying within the first three years unless they completed a qualified equity offering.  However, the provisions introduced by the American Recovery and Reinvestment Act of 2009 indicate  that once an institution notifies Treasury that it would like to repay its CPP investment, the Treasury must permit a TARP recipient to repay subject to consultation  with the appropriate Federal Banking Agency.

All institutions seeking to repay CPP will be subject to the existing supervisory procedures for approving redemption requests for capital instruments.  Supervisors will carefully weigh an institution’s desire to redeem outstanding CPP preferred stock against the contribution of Treasury capital to the institution’s overall soundness, capital adequacy, and ability to lend, including confirming that the institution has a comprehensive internal capital assessment process. The 19 BHCs that were subject to the SCAP process must have a post-repayment capital base at least consistent with the SCAP buffer, and must be able to demonstrate its financial strength by issuing senior unsecured debt for a term greater than five years not backed by FDIC guarantees, in amounts sufficient to demonstrate a capacity to meet funding needs independent of government guarantees.

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