The Saga Continues -- More on The State of Banking 2009

On February 25, 2009, the UST announced the terms and conditions of the Capital Assistance Program (“CAP”). Under CAP, the federal banking regulators will conduct “stress tests” to evaluate the capital needs of banks with in excess of $100 billion in assets. These “stress tests” have been much discussed with regard to what approach UST will take if it determines that such institutions need additional capital and such capital is not forthcoming from private sources.

What has not been discussed is how the bank regulators will evaluate banks under $100 billion in assets on a going-forward basis. Stress testing of loan portfolios and liquidity sources that yield positive results will assist those facing regulatory pressures. For others, however, such testing will exacerbate regulatory presumptions of a financial institution’s problems. Unfortunately, there is becoming less choice here.

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Capital Assistance Program Stress Tests Start February 25

Financial institutions with assets in excess of $100 billion seeking government assistance will undergo "stress tests" starting February 25, according to a joint statement released today by the Treasury Department, the FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve.  "Stress tests" are defined as "a forward looking assessment of what banks need to keep lending even through a severe economic downturn" by the Financial Stability Plan's Capital Assistance Program previously announced February 10, 2009.  The Capital Assistance Program creates a "capital buffer" by giving financial institutions a preferred security investment from the Treasury Department in convertible securities which can be converted into common equity if needed due to a "worse-than-expected economic environment."  Click here for today's joint statement.