The Federal Reserve on Monday announced rules for banks to repay taxpayer bailout funds, clearing the way for the 19 largest U.S. financial institutions to wind down their reliance on government support.
The rules apply to the nation's 19 largest banks, which have assets of more than $100 billion and were subjected to "stress tests" to determine their financial strength. The test results, released last month, showed 10 banks had to raise a total of $75 billion in new capital to withstand possible future losses.
Those banks have since been scrambling to raise the money through stock offerings and other financial moves. Banks that were not deemed to need more capital have been working to prove they can raise money without relying on guarantees against losses provided by the Federal Deposit Insurance Corp.
Banks wanting to repay bailout money — most of the 19 large banks — must show they can raise long-term debt without relying on the FDIC guarantee.
They also must persuade regulators that they will be able to continue lending to creditworthy borrowers; that they can maintain the minimum capital levels required under the stress tests; and that they will be able to meet funding obligations to business partners while "reducing reliance on government capital" and the FDIC guarantee.
The announcement is part of an effort to wind down all government support of banks — not just from the Treasury bailout program, but also from other subsidies.
Banks had to apply to their primary regulators for permission to repay the money. Successful applications were forwarded to Treasury for final approval.
Banks have chafed against rules imposed by Congress after they took the bailout money, including limits on executive compensation. Even after they repay the money, they still will rely on massive government subsidies including debt guarantees provided by the FDIC.
Last month, a handful of larger banks — BB&T, U.S. Bancorp, Capital One Financial Corp. and Bank of New York Mellon Corp. — said they were raising capital in order to repay TARP. They passed the government's stress tests with no capital requirements, so they and other banks with sufficient capital, such as JPMorgan and Goldman Sachs, are likely to get approval soon to return TARP, analysts say.
The first round of approvals are expected the week of June 8.
