Policy

TARP Payback Rules Announced

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The Federal Reserve Board says the first repayment of Troubled Asset Relief Program funds can begin the week of June 8, and lays out its rules for repayment. Among other things:

Any BHC [bank holding company] seeking to redeem U.S. Treasury capital must demonstrate an ability to access the long-term debt markets without reliance on the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP), and must successfully demonstrate access to public equity markets.

In addition, the Federal Reserve's review of a BHC's application to redeem U.S. Treasury capital will include consideration of the following:

  • Whether a BHC can redeem its Treasury capital and remain in a position to continue to fulfill its role as an intermediary that facilitates lending to creditworthy households and businesses;
  • Whether, after redeeming its Treasury capital, a BHC will be able to maintain capital levels that are consistent with supervisory expectations;
  • Whether a BHC will be able to continue to serve as a source of financial and managerial strength and support to its subsidiary bank(s) after the redemption; and
  • Whether a BHC and its bank subsidiaries will be able to meet its ongoing funding requirements and its obligations to counterparties while reducing reliance on government capital and the TLGP.

It would be deliciously diabolical if one of the 19 stress-tested banks went bankrupt after paying off its TARP loan, but that may be wishful thinking. And it's unlikely that many will conclude the Fed or the Treasury screwed up even if that does happen.

It will be interesting to see if one of naughty 19 doesn't get to pay off right away, takes a beating in public relations as a result, and then claims that the Treasury is responsible for devaluing its reputation. The original TARP-acceptance strong-arming was posited on the idea that the gigantibanks all had to hang together, so there wouldn't be any stigma attached to the charity. But paying off the charity might not be as easy to do without a few fall guys. Then again, the banks are long past the point of shame, so maybe even that won't matter.