The U.S. Treasury announced the terms and conditions for the Capital Assistance Program, which will include “stress tests” for some banks and is designed to shore up balance sheets of some of the country’s biggest financial institutions.
The U.S. Treasury announced the terms and conditions for the Capital Assistance Program, a core element of the Administration's Financial Stability Plan.
The purpose of the CAP is to restore confidence throughout the financial system that the nation's largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.
Under CAP, federal banking supervisors will conduct forward-looking assessments to evaluate the capital needs of the major U.S. banking institutions under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, banks will have an opportunity to turn first to private sources of capital.
Eligible U.S. banking institutions with assets in excess of $100 billion on a consolidated basis are required to participate in the co-ordinated supervisory assessments, and may access the CAP immediately as a means to establish any necessary additional buffer.
CAP's Terms and Conditions:
Ø Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th.
Ø CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer's option (subject to the approval of their regulator).
Ø After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date.
Ø The instrument is designed to give banks the incentive to replace USG-provided capital with private capital or to redeem the USG capital when conditions permit.
Ø With supervisory approval, banks will be able to request capital under the CAP in addition to their existing CPP preferred stock.
Ø With supervisory approval, banks will also be allowed to apply to exchange the existing CPP preferred stock for the new CAP instrument.
Ø Recipients of capital under the CAP will be subject to the executive compensation requirements in line with the Emergency Economic Stabilization Act of 2008, as recently amended. The Treasury will shortly be releasing rules to implement these amendments.
Ø As part of the application process, banks must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support. The Treasury Department will make these plans public when the bank receives the capital under the CAP.
Ø Taxpayers will be able to monitor the performance of banks receiving capital under the CAP. Banks receiving capital will be required to submit to Treasury monthly reports on their lending broken out by category. These will be posted on www.FinancialStability.gov.
Ø Recipients will also be subject to restrictions on paying quarterly common stock dividends, repurchasing shares, and pursuing cash acquisitions.
CAP White Paper
CAP Term Sheet
© US Treasury
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