FDIC’s Institutions Must Monitor TARP Funds

The Treasury has been under fire in recent weeks for its less-than-perfect implementation of the Troubled Asset Relief Program — particularly its failure to monitor how banks are using TARP infusions.  The Federal Deposit Insurance Corp. on Monday became the first bank regulator to require its state-chartered banks to monitor and report the ways in which they utilize TARP funds. It’s the first move in what many lawmakers hope will be a full-fledged movement, where all regulating agencies require their supervised institutions to report their use of capital injections, liquidity support and/or financing guarantees obtained through the government’s financial stability programs. Many lawmakers have pushed similar, if not identical requirements, in pending legislation. In a letter Monday to financial institutions, the FDIC said “given that government funds, capital and guarantees are being used to support banking institutions, banks are expected to document how they are continuing to meet the credit needs of creditworthy borrowers.” The letter outlined the FDIC’s expectations of banks to deploy funding in a manner that prudently supports credit needs in their market and strengthens bank capital. The monitoring process, according to the letter, should help determine how participation in federal programs has assisted institutions in supporting sensible lending and efforts to work with existing borrowers to avoid unnecessary foreclosures. The FDIC also “encouraged’ its institutions to include a summarized record of their fund usage in shareholder and public reports, annual reports and financial statements. Alongside the letter, the Agency issued a release that instructed all institutions how to report their monthly balance of debt covered by the liquidity guarantee. The question is whether other regulators follow the FDIC’s lead? A source familiar with the talks, according to an American Banker report, said a coordinated move is on the table. “The regulators are discussing the best way of going about….monitoring the use of funding,” a source, who spoke on the condition of anonymity told American Banker. “Banks never had public money investment before,” Steve Fritts, the FDIC’s associate director of risk management policy, told American Banker. “This is a big, new deal. It’s important to communicate with them, and make sure they understand that … the expectation is that they use this to support their primary business activities.” He also said observers should not read too much in to the FDIC’s issuance of the release alone, as it was meant to be “generalized” in the instance regulators or the Treasury Department creates more specific reporting standards in the future. Amid intense pressure from lawmakers to account for how each institution has used government granted capital, interim secretary for financial stability Neel Kashkari has continued to defend TARP’s current implementation — which doesn’t require funds to be monitored — saying it’s “difficult” to do so. House Financial Services Committee Chairman Barney Frank (D-Mass.) and other Democrats, however, have said in recent weeks they will not support releasing the additional $350 billion in TARP funds unless Treasury implements procedures to monitor how participating banks are using the funds. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.