As more banks verbalize their intent to pay back some of the bailout funds back to the government, the Federal Reserve laid out rules that clear the way for the nation’s largest banks to minimize their dependence of government support. The said rules will apply to financial institutions that have more than $100 billion in total assets. The number of banks that fall in this category is 19; 10 banks failed the “stress test” while the remaining 9 institutions were deemed healthy enough by the government.
From the Treasury’s $700 billion bailout package, financial institutions received $228.6 billion. The 10 banks that failed the stress test were also told they need to raise an additional $75 billion as a buffer for possible shocks in the economy. Since then, these banks have been rushing to raise the amount through share swaps and other financial maneuvers.
Meanwhile, those that weren’t required to raise more capital need to prove they can repay the bailout money without relying on FDIC guarantee. In addition, banks are also required to prove that they are capable of lending continuously to creditworthy borrowers after repaying their obligations. They must also maintain the same amount of capital required under the previous stress test.
The Fed’s announcement on repayment rules and procedures is an effort to slow down government support in the financial industry – not only from the Treasury department but on all other fronts.
How Much Do Banks Intend to Repay?
Financial organizations that received a part of the bailout money have chafed against some of the limits imposed on them. Most notable, these organizations want to get rid of the limits on executive compensation. But even if they want to pay back the government funds, they need to apply to their primary regulators first. Once that is approved, their applications will be given to the Treasury Department for approval.
Among the banks that intend to repay some part of the bailout fund include JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of New York Mellon Corp. and American Express Co. Together, they applied to pay back over $50 billion. The first round of approval is expected next week.
JPMorgan’s Strategy in Raising Capital
On Monday, JPMorgan announced that they intended to gain an additional capital of $5 billion from common stock offerings. Meanwhile, American Express said it will raise $500 million from the same strategy. JPMorgan, overall, has previously received $25 billion while American Express got $3.4 billion from the TARP program.
Other banks such as US Bancorp, Bank of New York Mellon, and Capital One Financial Corp. have already announced their intention to pay back the amount they received. Currently, they are also raising capital in order to do just that.