Stress Test Statement

May 6, 2009

Authored by: Robert Klingler

In advance of releasing the “Stress Test” results (scheduled for 5:00pm on Thursday, May 7, 2009), the Treasury and the federal banking regulators released a joint statement about the Supervisory Capital Assistance Program on May 6, 2009.  The joint statement also includes information about the process that will be used for institutions desiring to redeem their TARP Capital Purchase Program Preferred stock.

A few key points about the Stress Test:

  • The government intends to announce, for each of the 19 institutions individually and in the aggregate, estimates of: losses and loss rates across select categories of loans; resources available to absorb those losses; and the resulting necessary additions to the capital buffers.
  • Any of the 19 needing to raise capital will be given until June 8, 2009 to develop a detailed capital plan, and until November 9, 2009 to implement that plan.
  • As part of the capital plan, an institution may apply for Mandatory Convertible Preferred under the TARP Capital Assistance Program, and may convert its existing TARP Capital Purchase Program Preferred shares into the Capital Assistance Program Convertible Preferred shares.
  • “Smaller financial institutions generally maintain capital levels, especially common equity, well above regulatory capital standards.”
  • Accordingly, the government does not intend to expand the Stress Test beyond the initial 19 bank holding companies (at least officially).
  • The Treasury reiterates that the TARP Capital Assistance Program is available to other institutions on the same terms and conditions applicable to the 19 Stress Tested banks.  The Treasury intends to process applications received “in an expedient manner.”  (No discussion is made of when or if term sheets will be made available for non-publicly traded institutions to participate in the Capital Assistance Program.

A few key points about redeeming TARP Capital Purchase Program investments:

  • All bank holding companies seeking to repay TARP funds will be subject to existing procedures for approving redemption requests for capital investments.  (See the Federal Reserve’s earlier guidance on redeeming capital instruments.)
  • The 19 participants in the Stress Test (and only the 19 participants in the Stress Test) must have a post-repayment capital base that is consistent with the Stress Test results and will be required to demonstrate their 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.”
  • In analyzing requests to redeem TARP funds, the federal banking regulators will consider the institution’s: overall soundness, capital adequacy and ability to lend.