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Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
FOR IMMEDIATE RELEASE
May 6, 2009
Joint Statement on the Treasury Capital Assistance Program and the Supervisory Capital Assessment Program
WASHINGTON — During this period of extraordinary economic uncertainty, the U.S. federal banking supervisors believe it to be important for the largest U.S. bank holding companies (BHCs) to have a capital buffer sufficient to withstand losses and sustain lending even in a significantly more adverse economic environment than is currently anticipated. In keeping with this aim, the Federal Reserve and other federal bank supervisors have been engaged in a comprehensive capital assessment exercise--known as the Supervisory Capital Assessment Program (SCAP)--with each of the 19 largest U.S. BHCs.
The SCAP will be completed this week and the results released publically by the Federal Reserve Board on Thursday May 7th, 2009 at 5pm EDT. In this release, supervisors will report--under the SCAP "more adverse" scenario, for each of the 19 institutions individually and in the aggregate--their estimates of: losses and loss rates across select categories of loans; resources available to absorb those losses; and the resulting necessary additions to capital buffers. The estimates reported by the Federal Reserve represent values for a hypothetical 'what-if' scenario and are not forecasts of expected losses or revenues for the firms. Any BHC needing to augment its capital buffer at the conclusion of the SCAP will have until June 8th, 2009 to develop a detailed capital plan, and until November 9th, 2009 to implement that capital plan.
The SCAP is a complement to the Treasury's Capital Assistance Program (CAP), which makes capital available to financial institutions as a bridge to private capital in the future. A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government reaffirms its commitment to stand firmly behind the banking system during this period of financial strain to ensure it can perform its key function of providing credit to households and businesses.
Understanding the Results of Supervisory Capital Assessment Program
The SCAP Focus on the Quantity and Quality of Capital
Minimum capital standards for a BHC serve only as a starting point for supervisors in determining the adequacy of the BHC's capital relative to its risk profile. In practice, supervisors expect all BHCs to have a level and composition of Tier 1 capital well in excess of the 4% regulatory minimum, and also to have common equity as the dominant element of that Tier 1 capital.
Under the SCAP, supervisors evaluated the extent to which each of the 19 BHCs would need to alter either the amount or the composition (or both) of its Tier 1 capital today to be able to comfortably exceed minimum regulatory requirements at year-end 2010, even under an more adverse economic scenario.
The SCAP capital buffer for each BHC is sized to achieve a Tier 1 risk-based ratio of at least 6% and a Tier 1 Common risk-based ratio of at least 4% at the end of 2010, under a more adverse macroeconomic scenario than is currently anticipated.
The SCAP focuses on Tier 1 Common capital—measured by applying the same adjustments to "voting common stockholders' equity" used to calculate Tier 1 capital--as well as overall Tier 1 capital, because both the amount and the composition of a BHC's capital contribute to its strength. The SCAP's emphasis on Tier 1 Common capital reflects the fact that common equity is the first element of the capital structure to absorb loss and offers protection to more senior parts of the capital structure. All else equal, more Tier 1 Common capital gives a BHC greater permanent loss absorption capacity and a greater ability to conserve resources under stress by changing the amount and timing of dividends and other distributions.
The Role of the SCAP Buffer
The presence of this one-time buffer will give market participants, as well as the firms themselves, confidence in the capacity of the major BHCs to perform their critical role in lending, even if the economy proves weaker than expected. Once this upfront buffer is established, the normal supervisory process will continue to be used to determine whether a firm's current capital ratios are consistent with regulatory guidance.
The SCAP and the Capital Planning Process
In addition, as part of the 30-day planning process, firms will need to review their existing management and Board in order to assure that the leadership of the firm has sufficient expertise and ability to manage the risks presented by the current economic environment and maintain balance sheet capacity sufficient to continue prudent lending to meet the credit needs of the economy.
Supervisors expect that the board of directors and the senior management of each BHC will give the design and implementation of the capital plan their full and immediate attention and strong support. Capital plans will be submitted and approved by supervisors by June 8th, 2009. Upon approval, these capital plans will be the basis for the BHC's establishment of the SCAP capital buffer by November 9th, 2009.
Mandatory Convertible Preferred under the CAP
The MCP instrument is designed to give banks the incentive to redeem or replace the government-provided capital with private capital when feasible. The term sheet for MCP is available at www.financialstability.gov.
The SCAP focused on the largest financial firms to ensure that they maintain adequate capital buffers to withstand losses in an adverse economic environment. Smaller financial institutions generally maintain capital levels, especially common equity, well above regulatory capital standards. There is no intention to expand the SCAP beyond the 19 BHCs that have recently completed this exercise.
The Treasury reiterates that the CAP application process remains open to these institutions under the same terms and conditions applicable to the 19 SCAP BHCs. The Treasury stands ready to review and process any applications received in an expedient manner. For those firms wishing to apply to CAP, supervisors will review those firms' risk profiles and capital positions. In addition, supervisors will evaluate the firms' internal capital assessment processes, including capital planning efforts that incorporate the potential impact of stressful market conditions and adverse economic outcomes.
Redeeming Preferred Securities Issued under the CPP
All BHCs seeking to repay CPP will be subject to the existing supervisory procedures for approving redemption requests for capital instruments.
The 19 BHCs that were subject to the SCAP process must have a post-repayment capital base at least consistent with the SCAP buffer, and must be able to demonstrate its financial strength by issuing senior unsecured debt for a term greater than five years not backed by FDIC guarantees, in amounts sufficient to demonstrate a capacity to meet funding needs independent of government guarantees.
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