Putting TARP to Work

Banks can now use US Treasury Department capital acquired through the Troubled Asset Relief Program (TARP) toward their Tier 1 capital. This boosts capital ratios and puts TARP money to work not only as a liquidity injection but also as a potential lift to the same capital ratios studied by regulators as part of the government-initiated stress tests. The Fed’s announcement comes as many large banks are interested in a TARP exit, lining up to repurchase stocks The final rule adopted by the Fed today allows bank holding companies to include senior perpetual preferred stock issued to the Treasury through TARP toward their Tier 1 capital “without restriction,” according to a media statement out of the Fed. This is the same capital ratio used by federal regulators in the stress tests of major banks . Bank holding companies that failed the government’s Supervisory Capital Assessment Program  (SCAP) must achieve a 6% Tier 1 risk-based capital ratio and a 4% Tier 1 common risk-based ratio by year-end ‘10. Banks found to lack capital have until June 8 to develop a detailed plan to raise capital and until November 9 to put the plan to work, according to details released in early May by the Treasury. The deadline could not prevent TARP repayments by the 14 banks to already have repurchased preferred stock through the Capital Purchase Program, according to the latest transaction report. The reasons for repayment ranged from the stigma associated with accepting government aid and tighter compensation-related regulations to capital raised at the institutions, to sufficient capital raised under profitable business practices. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.