• Recent Developments in Government Banking Programs
  • June 23, 2009 | Authors: Karen L. Grandstrand; Karla L. Reyerson
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • During the past months, the U.S. government has remained active in announcing new programs designed to assist struggling banks and has also worked to adjust several existing programs related to the financial crisis. This article will briefly review several program extensions and changes that were recently announced, as well as the new Public-Private Investment Program. A detailed discussion of these topics would be lengthy and, based on the continuous program changes, potentially outdated.

    TARP Capital Purchase Program

    Extension of Participation for Community Banks

    On May 13, 2009, the Treasury announced modifications to the CPP for banks and holding companies with less than $500 million in assets (Eligible Organizations). First, Eligible Organizations will have an additional six months to apply for participation, regardless of whether such organizations are public, private, S corporations, or mutuals. The new application deadline is November 21, 2009.

    In addition, Eligible Organizations can now request a capital investment from the Treasury that equals up to 5% of risk-weighted assets. Originally, organizations could only request up to 3% of their risk-weighted assets. Eligible Organizations that are already participating in the CPP or have pending applications are allowed to reapply to receive the higher amount, and such applications will receive expedited processing. The Treasury has not stated whether those Eligible Organizations that have voluntarily withdrawn their applications for CPP may reapply.

    The Treasury will not require warrants for the amount of its capital investment that exceeds 3% of the risk-weighted assets of an Eligible Organization.

    Finally, those banks that wish to form a bank holding company for purposes of CPP participation now have until November 21, 2009 to obtain the necessary regulatory approvals to proceed with the formation.

    The Treasury has released a set of frequently asked questions (FAQs) related to the expansion of the CPP for Eligible Organizations, which may be found at http://www.financialstability.gov/docs/CPP/ FAQonCPPforsmallbanks.pdf.           

    S Corporations

    On April 13, 2009, the Treasury posted the standard agreements that S corporations will need to execute in order to obtain CPP funds. CPP applicants that are S corporations and are waiting for Treasury approval of their CPP applications should review these documents to determine if there are any terms in the agreements that affect the applicant’s ability or desire to participate in the program. The agreements are available at www.financialstability.gov/roadtostability/CPPappdocs.html.

    Mutual Institutions

    On April 7, 2009, the U.S. Treasury released CPP term sheets for mutual holding companies. Mutual holding companies that participate in the CPP will pay a 5% interest rate during the first five years of participation and 9% thereafter.

    On April 14, 2009, the Treasury released the CPP term sheets for mutual banks and savings associations that do not have a holding company. The interest rate for these institutions will be 7.7% for the first five years, increasing to 13.8% thereafter.

    The term sheets for mutuals are available at http://www.financialstability.gov/roadtostability/ CPPappdocs.html. The agreements that mutual institutions will need to execute in order to participate in the CPP are not yet available.

    CPP Investments Qualify as Tier 1 Capital

    On May 21, 2009, the Federal Reserve adopted a final rule allowing those bank holding companies issuing senior perpetual preferred stock to the Treasury under the CPP to count such stock as Tier 1 capital without restrictions.

    The same day, the Federal Reserve adopted an interim final rule that would allow bank holding companies organized as S corporations or mutuals to include all subordinated debt issued to the Treasury under CPP as Tier 1 Capital, provided that the subordinated debt will count toward the limit on the amount of other restricted core capital elements includable in Tier 1 capital. The interim rule also allows small bank holding companies that are S corporations or mutuals to exclude the subordinated debt issued under the CPP from treatment as “debt” as part of the debt-to-equity standard under the Small Bank Holding Company Policy Statement.

    Both rules are effective upon publication in the Federal Register, which should occur soon. The Federal Reserve is requesting comments on the interim final rule for S corporations and mutuals. Comments must be received within 30 days after publication in the Federal Register.

    Repayment of CPP Funds

    The Treasury recently released a set of FAQs related to repayment of funds obtained through the CPP. Among other things, the FAQs reiterate that participating institutions are no longer required to complete a qualified equity offering in order to repay CPP funds within the first three years of receiving the funds. Repayment is still subject to consultation with the institution’s federal regulator. To review the FAQs, go to http://www.financialstability.gov/docs/FAQ_CPP-CAP.pdf.

    Deposit Insurance

    On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act, which, among other things, extends the temporary increase in the maximum deposit insurance amount of $250,000 per depositor through December 31, 2013. This provision became effective upon signing.

    Banks are encouraged to post the following statement, or affix a sticker with this statement, next to the official FDIC sign: “FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2013.” The FDIC also will issue a temporary official FDIC sign reflecting the increase, which banks may order. Use of the FDIC’s temporary official FDIC sign is optional.

    The FDIC is strongly encouraging banks to inform depositors of the temporary nature of the increased coverage, particularly when opening new accounts and CDs that mature after December 31, 2013.

    Temporary Liquidity Guarantee Program

    Extension of Debt Guarantee Program

    The FDIC recently extended the duration of the Debt Guarantee Program (Debt Program) component of its Temporary Liquidity Guarantee Program (TLGP). Originally, the Debt Program provided that the FDIC would guarantee participants’ senior unsecured debt issued between October 14, 2008 and June 30, 2009. On March 18, 2009, the FDIC extended this term to October 31, 2009. This extension is available without prior application to the FDIC for those participants that issued guaranteed debt under the Debt Program before April 1, 2009. Participants that had not issued guaranteed debt by April 1 must apply by June 30, 2009 to issue guaranteed debt during the extended coverage period. The guarantee on debt issued after June 30, 2009 will expire no later than December 31, 2012.

    Imposition of Additional Fees

    In addition to extending the issuance period for the Debt Program, the FDIC also announced certain fee increases related to the Debt Program. Specifically, the FDIC will add a surcharge to the fees charged for guaranteed debt issued with a maturity of one year or greater (One Year Debt). If the One Year Debt is issued between April 1, 2009 and June 30, 2009, with a maturity no later than June 30, 2012, the surcharge will be equal to 10 basis points for insured financial institutions and 20 basis points for other participants. For One Year Debt issued (1) after April 1, 2009 and maturing after June 30, 2012, or (2) after June 30, 2009, the surcharge will be equal to 25 basis points if issued by insured financial institutions and 50 basis points if issued by other participants.

    Public-Private Investment Program

    The Treasury announced on March 23, 2009 that it is working with the FDIC and the Federal Reserve to administer a new program designed to remove troubled assets from the books of financial institutions. The Public-Private Investment Program (PPIP) includes two components: the Legacy Loan Program and the Legacy Securities Program.

    Legacy Loan Program

    The Legacy Loan Program (LLP) is designed to encourage private investors to purchase troubled loans from banks, with financial support from the government. Each participating bank will identify a pool of loans it wants to sell in consultation with its primary federal regulator. While the FDIC has indicated that it will initially accept only single-seller pools, pools made up of loans from multiple banks are being discussed. After a pool is constructed, the FDIC will oversee a bidding process to sell the pool to public-private investment funds (PPIFs). The PPIFs will be funded by private investors and an equity investment from the Treasury. The PPIFs will also be eligible to receive a debt guarantee from the FDIC to assist in financing the purchase. The LLP is not operational yet, but the FDIC is planning to conduct a trial auction in June 2009.

    Legacy Securities Program

    The goal of the Legacy Securities Program (LSP) is to reignite the market for highly rated mortgage-backed securities (MBS) so that financial institutions can sell the MBS they are holding. This would free up the banks’ capital and allow them to increase their lending. The Treasury will pre-qualify fund managers who will raise equity capital from private investors to invest in eligible assets, such as MBS. The Treasury will match the private equity raised, and debt financing will be available both through the Treasury and via the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). As with the LLP, the LSP is not yet functional, and a start date has not been announced.