Updated Guidance from Regulators

November 5, 2008

Authored by: Robert Klingler

Over the last several days, we’ve had a number of conversations with the federal banking regulators on TARP Capital applications.  Although this guidance has not proved to be entirely consistent across agencies, we wanted to pass it along as we have it.  We have identified the federal regulatory agency which provided us the guidance, but we generally expect some degree of uniformity across agencies.

In addition to discussing the treatment of non-exchange listed public companies, private companies, and Sub S companies, the Federal Reserve Bank of Atlanta also emphasized that the Treasury Department intends to invest only in entities that are “viable,” with viability being determined on a case-by-case basis.  The OCC has separately provided guidance that, as a rule of thumb, an applicant must be viable without the TARP Capital in order to be approved to received TARP Capital.  Based on our conversations with regulators last week, we continue to believe the best indicator of viability is the ability of the applicant to earn money operationally, i.e. pre-tax and pre-provision, which is also known as “pre pre” earning).

The Federal Reserve Bank clarified, however, that for a non-viable institutions with a signed acquisition agreement, the acquiring entity can submit a TARP Capital application on behalf of the non-viable institution, in which case the Treasury will consider the viability of the combined entity.  In the same meeting the FDIC noted that, by helping healthy institutions finance non-viable institutions, the TARP Capital program operated as a means of providing open bank assistance.

The FDIC has advised us that applicants for TARP Capital should indicate that they have reviewed the Investment Agreements on the Treasury’s website, even if the applicant is not an exchange-listed public company, and therefore the relevant investment agreements have not been provided.  Presumably this will allow the federal banking regulator not to need an amended application before final approval.

Both the Federal Reserve and the OCC have discussed with us how TARP Capital funds can be used.  The OCC noted that “politically, it is desirable that the funds be used to make loans,” but noted that other uses of the funds that would strengthen the applicant will likely be viewed favorably.  The Federal Reserve noted the intent of the TARP Capital is to expand lending rather than to fill holes, but also noted that there were few limitations on the use of funds under the terms of the TARP Capital Program.

The OCC explicitly noted that an applicant that has an ongoing private capital raising effort and/or a pending transaction should provide additional details regarding that event in its TARP Capital application.