Well, once in a while the authorities exceed my low expectations, and this is one of those instances. The Fed is insisting that the bank recipients of TARP fund meet a higher standard, in terms of balance sheet strength, than set in the stress tests. The banks are grumbling that this is not what they expected.
This is again industry posturing. The powers that be have been pointedly non-committal on the repayment of TARP funds, saying they were studying the matter. The idea that it should be the same as the standards for the stress tests, which were a minimum threshold to determine if they needed to raise MORE money, did not mean that “passing” it implied a bank was strong enough to escape from the extra supervision that came with being a TARP recipient.
Of course, there is an obvious reason for the Fed being a bit bloody-minded here. It would undermine its credibility completely if a bank repaid the TARP and went into the crapper any time in the next ten years, barring an unforeseen disaster like the Yellowstone caldera blowing up (or ones the great unwashed think could conceivably come to pass but the officialdom deems to be impossible, like a dollar crisis).
Federal Reserve officials surprised bankers in the past week by demanding they raise specific amounts of new capital before repaying taxpayer funds, applying a more stringent assessment than the stress tests in May.
JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity, less than four weeks after being informed they had enough to withstand a deeper economic slump. Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told June 1, people with direct knowledge said.
The central bank’s further scrutiny signals concern at the political and economic dangers of having a bank boomerang back to government aid once it leaves the program.
“The Fed doesn’t want to be criticized for allowing people to repay this and then having the banks say we just don’t have the capital to make loans now,” said Lawrence Kaplan, a former attorney at the Office of Thrift Supervision who now works at law firm Paul, Hastings, Janofsky & Walker LLP in Washington. “It’s an exercise to make sure that no one is going to get criticized for allowing these redemptions.”
The Fed’s demands also partly reflect the biggest three- month rally in U.S. financial shares in at least two decades, which has made it easier for banks to raise the funds…
Fed approvals for an “initial set” of TARP repayments by banks among the 19 largest institutions are scheduled to be announced next week…
If banks repay TARP funds next week, “politically, the administration can claim a victory,” said Dino Kos, managing director at Portales Partners LLC and a former New York Fed executive vice president. “They can claim TARP is working, we’re getting our money back and making a profit. But there are more shoes to drop in commercial and industrial loans, leveraged loans, and real estate.”