Fed on stress test

A day prior to the release of the results of the stress tests, the Fed released a statement containing some of the important information many are seeking.  In particular it contains the ratios that banks are expected to meet up until the end of 2010.  Thirty days from today, the banks need to submit a plan on how to increase their capital levels and another 6 months to implement that plan.  In the statement released yesterday, the Fed outlines the requirements that need to be in the capital plan of banks:

  1. A list of steps to address weaknesses, where appropriate, in the BHC’s (bank holding companies) internal processes for assessing capital needs and engaging in effective capital planning.
  2. An outline of the steps the firm will take over time to repay government provided capital taken under the Capital Purchase Program (CPP), Targeted Investment Program (TIP), or the Capital Assistance Program (CAP), and reduce reliance on guaranteed debt issued under the TLGP.
  3. A detailed description of the specific actions to be taken to increase the level of capital and/or to enhance the quality of capital consistent with establishing the SCAP buffer. BHCs are encouraged to design capital plans that, wherever possible, actively seek to raise new capital from private sources. These plans should include actions such as
  • Issuance of new private capital instruments;
  • Restructuring current capital instruments;
  • Sales of business lines, legal entities, assets or minority interests through private transactions and through sales to the PPIP;
  • Use of joint ventures, spin-offs, or other capital enhancing transactions; and
  • Conservation of internal capital generation, including continued restrictions on dividends and stock repurchases and dividend deferrals, waivers and suspensions on preferred securities including trust preferred securities, with the expectation that plans should not rely on near-term potential increases in revenues to meet the capital buffer it is expected to have.

The statement also spoke of the banks’ boards and management and the need to review that they have the right amount of expertise and ability for risk management when faced with the scenarios used in the stress test.

On the desire to repay the TARP money, which would come in the form of redeeming the preferred shares, banks would need to show the ability to issue unsecure debt with maturity lasting longer than 5 years without the backing of the government.

The whole statement HERE.


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