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Fast TARP exit meant less capital for some banks: U.S. audit

Customers use ATM machines inside of a Bank of America branch in Times Square in New York
Customers use ATM machines inside of a Bank of America branch in Times Square in New York

By David Lawder

WASHINGTON (Reuters) - Some large U.S. banks would have stronger capital bases to better deal with today's market stresses had regulators not relaxed bailout repayment criteria in late 2009, a new government audit showed on Friday.

Bank of America Citigroup , Wells Fargo and PNC Financial were allowed exit the Troubled Asset Relief Program without raising as much equity capital as initially prescribed by the Federal Reserve, the TARP Special Inspector General said in the report.

Following bank stress tests earlier in 2009, the Fed gave several banks guidance that they must raise $1 in common equity for every $2 in TARP bailout funds repaid -- a formula meant to enable them to withstand future stresses.

But this standard -- which was never previously made public -- was quickly relaxed, allowing Bank of America, Citi and Wells Fargo to repay taxpayers nearly simultaneously in December 2009, raising a combined $49.1 billion in equity capital.

Enforcement of the $1 in equity for every $2 repaid guidance would have required $57.5 billion in equity capital to be raised by the three institutions. PNC was later allowed to exit TARP under similar relaxed guidance.

"It's certainly a missed opportunity to get these banks out of TARP with not only more capital but higher quality capital, which could have had long-lasting consequences in strengthening their capital base," TARP acting special inspector general Christy Romero told Reuters.

She said regulators "bowed" to pressure from the banks, who were keen to escape executive compensation restrictions associated with the bailout funds. But there was also pressure from the Treasury to allow them to exit TARP more quickly and repay taxpayers, she said.

U.S. bank shares, particularly those of Bank of America, have been hit by funding concerns amid market turmoil this month and Moody's Investors Service last week cut credit ratings for B of A, Citi and Wells Fargo.

The SIGTARP report does not specifically address the current market concerns, but Romero said the original Fed exit guidance was aimed at providing ample and high-quality capital to absorb potential losses and demonstrate the banks' viability to investors.

"What you see today is the banks selling off assets. While that may raise capital, it's a one-time hit, and also you've just lost potential sources of revenue generation," Romero said.

CAPITAL QUICKLY

The report quotes U.S. Treasury Secretary Timothy Geithner as saying that Treasury pursued a "forceful strategy of raising capital early" to pressure on banks to sell shares sooner rather than later. "We thought the American economy would be in a better position if went out and raised capital," the report quoted him as saying.

Geithner often cites the U.S. bank stress tests and bank capital raisings of 2009 as a major source of strength for the U.S. financial system and is now pressing European policymakers to ensure their banks have adequate capital to withstand sovereign debt problems.

Tim Massad, Treasury assistant secretary for financial stability, said taxpayers stand to earn more than $20 billion from bailout investments in U.S. banks.

"Treasury wanted the major banks to raise private capital and repay taxpayers because that was necessary to restore stability and strength to the financial system," he said.

(Reporting by David Lawder, editing by Bernard Orr)

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