CORRECT: Banks Eager To Repay TARP Find New Capital Hurdles
03 June 2009 - 5:06PM
Dow Jones News
Bank regulators have thrown a wrench into bankers' capital
planning.
After the results of the stress test were announced last month,
some bankers were quick to say that they were ready to repay the
money they received from the Troubled Asset Relief Program. Some
figured they could raise enough money to fill gaps found by the
stress test, and raise a sum that should suffice for repaying their
TARP investments, in one fell swoop.
Apparently, some miscalculated how demanding the government
would be about how much capital they needed to raise to repay
TARP.
The Federal Reserve's rules to return TARP money, formally
announced late Monday but outlined to bankers last week, require
that banks demonstrate that they can access the capital markets,
both equity and also debt not guaranteed by the Federal Deposit
Insurance Corp. They must also demonstrate they can continue to
lend.
Capital, the hot commodity for the last two years, remains the
key issue even after the stress test. The Federal Reserve made
clear Monday that capital levels after TARP repayment have to be
"consistent with supervisory expectations."
Those "supervisory expectations" are unrelated to the
requirements set by the stress test. They aren't firm ratios but
vary from bank to bank; yet bankers eager to repay TARP know what
those expectations are through their communications with
regulators.
For some banks, TARP repayment won't be done until some time in
the future. Some banks haven't even requested repaying TARP
yet.
Others, like Fifth Third Bancorp (FITB), tried to anticipate
what regulators would require to repay TARP. The Cincinnati bank
said last month it would raise $1.5 billion in fresh capital to
improve common equity, as required by the Fed's stress test. A
spokeswoman said Tuesday, "We determine it would be wise to raise
more than we needed for the immediate moment. This part of our
capital plan displays that we have the ability to do that."
Morgan Stanley (MS) was among those who had to go back to
market. It raised $10 billion in debt and equity last month
following the stress test; those measures also looked as if they
fulfilled the requirements set out by the Federal Reserve on Monday
to repay TARP. Yet the bank was told by regulators to raise another
$2.2 billion in equity to improve capital before it could repay
TARP.
Goldman Sachs Group Inc. (GS), meanwhile, raised $5 billion in
equity in April and doesn't need any more to repay TARP, according
to people familiar with the matter.
Wells Fargo & Co. (WFC) is eager to repay, but hasn't issued
the required debt. Moreover, Deutsche Bank Securities analyst Matt
O'Connor said in a research note that the bank may need to raise
more equity. The bank declined to discuss the matter.
Bank of America Corp. (BAC) has issued debt. But repayment
doesn't seem to be a near-term event. The bank didn't return phone
calls for comment.
PNC Financial Services Group Inc. (PNC)'s Chairman and Chief
Executive James Rohr is in no rush to pay it back - it may not be
best for shareholders to raise dilutive capital to pay back TARP,
he has said. The bank hasn't formally requested repayment,
according to people familiar with the matter.
JPMorgan Chase & Co. (JPM) was told by its regulators that
it has enough capital to sustain even a severe economic downturn,
but on Tuesday morning raised $5 billion to repay TARP. It had
issued non-guaranteed debt, but no equity, because it argued it
didn't need any.
However, "most banks will not get multiple bites at the public
market apple so they will need to approach the markets deliberately
raising sufficient capital," said Lawrence Kaplan from the Banking
and Financial Institutions Group at law firm Paul Hastings, and a
former special counsel at the Office of Thrift Supervision.
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936;
matthias.rieker@dowjones.com
(Joe Bel Bruno and Marshall Eckblad contributed to this
story.)