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Credit Crisis Advisory: Stress in the Credit Markets I

Recapitalizing the Banks


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Volume III

Following similar initiatives in Europe, the U.S. Treasury Department, the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) jointly announced on October 14, 2008, a TARP (Troubled Asset Relief Program) Capital Purchase Program to invest directly in U.S. banks and provide guarantees for newly issued bank unsecured debt.Under this program, $250 billion will be available by year end in what is described as a “voluntary capital purchase program.” The minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets.

The key points regarding the TARP Capital Purchase Program:

  • The U.S. government will acquire senior preferred stock in FDIC insured banks
  • Participation is voluntary, but banks must elect to participate by November 14, 2008
  • Nine institutions initially have agreed to participate in the program (Bank of America and Merill Lynch, The Bank of New York Mellon and State Street, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Wells Fargo and Wachovia)
  • Other banks will be invited to participate in the program
  • The FDIC extends deposit guarantees to all non-interest bearing deposits in transaction accounts
  • The U.S. government will guarantee newly issued unsecured debt (to refinance upcoming maturities for three years from the date of issuance and maturities through June 2009)
  • The banks participating in the program will be expected to use the capital to increase their lending activities and not to
    hoard it
  • Unlike the United Kingdom arrangements for Royal Bank of Scotland and Lloyds/HBOS (Halifax/Bank of Scotland), there is no requirement
    to increase capital ratios from 8 percent to 12 percent. Under the current agreement with the U.S. Treasury, banks could add another
    $2.5 to $3.125 trillion in risk-weighted assets.

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