Treasury: Capital Assistance Now Available

The ""U.S. Treasury Department"":http://www.treasury.gov has released plans for its ""Capital Assistance Program"":http://www.treas.gov/press/releases/reports/tg40_captermsheet.pdf (CAP), a core element of the government's Financial Stability Plan. The Treasury issued terms and conditions for CAP on Wednesday, saying that the new program is intended to support confidence in the health of the nation's financial institutions and in the system as a whole, and promote lending to creditworthy borrowers.
In a publicly-issued ""white paper"":http://www.treas.gov/press/releases/reports/tg40_capwhitepaper.pdf, the Treasury said, ""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. In turn, market participants’ concerns over the capital positions of some institutions is impairing the ability of the system overall to perform its critical role of credit origination and intermediation.""
According to a _""Wall Street Journal"":http://www.wsj.com_ report, the administration wants to ensure the country's largest banks can survive even if the unemployment rate rises above 10 percent and home prices fall by another 25 percent. Although government officials say they don't expect the economy to reach such dire straits, the first step of the plan involves ""stress testing"" banks' balance sheets to determine if they have sufficient capital to withstand similar market conditions.
All U.S. banking institutions with assets in excess of $100 billion are mandated to participate in the supervisory stress tests, which are expected to take several weeks to complete. Banks with assets below $100 billion may choose to participate in the program in order to obtain additional funding.
Should regulators' forward-looking assessments indicate that an additional capital buffer is warranted, banks will have the opportunity to turn first to private sources of capital or will be required to accept another investment from the federal government. The Treasury said that in light of the current challenging market environment, it is making government capital available immediately through CAP to eligible banking institutions to provide this buffer.
The Treasury said CAP will give qualifying financial institutions access to contingent common equity provided by the U.S. government as a bridge to private capital in the future. Funding to banking organizations under this program will be in the form of a preferred security that is convertible into common equity, ""when and if needed to retain the confidence of investors or to meet supervisory expectations regarding the amount and composition of capital,"" the Treasury said. With supervisory approval, banks will also be allowed to exchange their previously awarded TARP preferred stock for the new preferred instrument.
According to the Treasury, ""The economy functions better when banking organizations are well managed in the private sector. U.S. government ownership is not an objective of CAP. However, to the extent that significant government stake in a financial institution is an outcome of the program, our goal will be to keep the period of government ownership as temporary as possible and encourage the return of private capital to replace government investment.""
In addition, any capital investments made by Treasury under this plan will be placed in a separate trust set up to manage the government’s investments in the nation's financial institutions. The objective of the trustees will be to protect and create value for the taxpayer as a shareholder over time, the Treasury explained.
President Barack Obama said in his primetime address to the joint chambers of Congress on Tuesday, that he expects the banking system to need additional funds beyond the $700 billion bailout package approved by legislators last fall. In addition to the Capital Assistance Program, Obama's plan for financial recovery includes a Consumer Business Lending Initiative to unfreeze secondary credit markets, a Public Private Investment Fund to raise private capital to purchase legacy assets, and a Homeowner Affordability and Stability Plan to restructure or refinance mortgages for as many as 7-9 million struggling homeowners.
Additional details of the forward-looking capital assessments and CAP terms can be found at ""FinancialStability.gov"":http://www.FinancialStability.gov.