Joint Statement Attempts to Ease Bank Nationalization Fears

February 23, 2009 No Comments »

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A joint statement issued today by the Treasury, FDIC, OCC, OTS, and the Federal Reserve looks to quell bank nationalization worries currently floating about.

“A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery,” the statement said.  “The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses.”

“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth.  Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.”

The group reiterated that the Capital Assistance Program announced on February 10, to be initiated on February 25, will ensure major banking institutions are “appropriately capitalized” with “high-quality capital.”

The program will review large banks’ balance sheets to determine if they’ll need more capital in the event of a more severe economic climate, in order to “cushion against larger than expected future losses.”

Though institutions will “have the opportunity” to turn to private sources of capital first, a “temporary capital buffer” will be made available by the government in the form of convertible preferred shares.

Capital injections made under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares if deemed necessary to maintain or improve capital quality.

“Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.  This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated.”

The statement implied that bank nationalization was a method of last resort in light of recent reports that claimed the government could take a 25-40 percent stake in Citi via its convertible shares.

Such a move wouldn’t rely on additional capital, but it would dilute value for current shareholders (Citi is currently trading at just over $2); the hope however, is that it would induce others to invest alongside the government.

“Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands,” the statement concluded.

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