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Regulators Pledge to Put More Capital into Banks

Source: CNBC

Posted on 23 Feb 2009

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U.S. banking regulators Monday pledged to provide more capital to banks as needed and keep large institutions viable through a new capital assessment program to be launched Wednesday.

"The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses," the regulators said in a statement issued by the U.S. Treasury that named no individual banks.

"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," the regulators said. "Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments."

The program to be launched Wednesday -- the Capital Assistance Program -- was announced Feb. 10 by U.S. Treasury Secretary Timothy Geithner as part of a larger bank rescue plan that will include the creation of a public-private partnership to mop up toxic assets on bank books.

Under the Capital Assistance Program, regulators will conduct "stress tests" to evaluate the potential capital needs of major U.S. banks should the economy perform more poorly than expected.

"Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital," the regulators said.

"Otherwise, the temporary capital buffer will be made available from the government.

The announcement followed a report on Sunday night that Citigroup was in talks on the U.S. government taking a bigger stake in the bank. The Wall Street Journal said taxpayers could end up owning as much as 40 percent of the ailing lender's common stock. The announcement did not mention Citigroup or any other institution.

Any government capital under the new program will come in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks well capitalized, the regulators said. These can be retired before conversion if conditions improve.

Banks that previously received preferred stock capital injections under the Troubled Asset Relief Program can exchange these shares for the mandatory convertible preferred stock, "to enhance the quality of their capital."

The regulators stressed, however, that major institutions currently have more than enough capital to be considered well capitalized.

The Capital Assistance Program aims to ensure that they have sufficient capital to support economic recovery, even if conditions worsen.

"Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands," the regulators said.

In addition to the Treasury, these regulators include the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.