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Commentary: Tightening of TARP Capital Standards

Conversations with each of the federal banking regulators over the last several days confirm what we have heard elsewhere: the distribution of TARP Capital that started out with a more liberal bias has now turned more conservative.  Regulators have recently indicated that institutions with a CAMELS rating of 1 and 2 are almost certainly likely to receive an investment, while 3-rated institutions are now described as “perhaps” receiving an investment.  4 and 5-rated banks are unlikely to receive any TARP Capital, absent unique circumstances.  (Just a few weeks ago, these same regulators were telling us that a 3-rated institution would be treated more like a 2-rated institution, and that 4-rated institutions would “perhaps” receive an investment.)  This shift is certainly an outgrowth of Treasury’s position that the main test of which institutions will receive capital investments is assured long term viability.

What does this mean for the thousands of banks that will not receive funding?  They certainly need to be considering a public relations initiative to manage or preempt the questions that will come at them from shareholders and the local media.  Perhaps the conversation could be along the following lines: “(i) the banking industry did not ask for this plan (which has changed dramatically since it was first proposed); (ii) an investment by the Treasury in a bank is not an automatic guarantee that a particular bank will be successful and neither is a decision not to invest some sort of condemnation; (iii) our loan portfolio reflects our community and the real estate lending which helped our community grow is suffering; and (iv) we are here for the long run and look forward to meeting the credit needs of our customers for years to come.  Together we will both survive the current economic challenges.”

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Commentary: Reputation Risk from Participation

The ABA has noted that some banks are concerned with the reputational risk of participating in a bail-out.   While some customers may have this concern, it does not change our belief that all eligible banks should strongly consider participating.   Having said that, we also think banks should be prepared to deal with this issue and should be proactive with their customers.   The emphasis should be on supporting the Government’s program to strengthen the entire banking system in order to enable banks to continue supporting their local community through this economic downturn.  The program is designed to earn a return for the Government (and thus the taxpayer), and is thus not a “bail-out” at all.   The program is for healthy banks, not to save problem banks.  Customers should be comforted by the facts.

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Commentary: Does Accepting TARP Capital Mean Additional Regulation?

We have heard a number of bankers state that they are concerned with accepting the TARP Capital, fearing potential future regulation imposed on those that accept government money.  While each bank’s situation is unique, we generally consider this concern to be overstated for the following reasons:

  1. Once the TARP Capital is in place and the preferred stock and warrants are issued, the terms of those instruments are defined by contract.  The government should not be able to modify the terms to give itself a better deal.  For example, the government cannot require that the institution pay the 9% dividend before the expiration of five years.
  2. We believe that if the government decides to impose additional regulatory restrictions (which in this economic environment seems likely), it is more likely to do so with regard to the whole industry rather than distinguish between banks that accepted the TARP Capital and those that did not.  From a policy perspective, Congress and the regulators may view “the whole industry” as having been helped and therefore that “the whole industry” should bear the burden of any additional regulations.
  3. The government already has broad powers to regulate financial institutions; it seems unlikely that the government would use its relatively weak power as a preferred shareholder to impose change when it has stronger regulatory powers to impose change.
  4. The government may impose one or more of the restrictions that are currently associated with the TARP Capital program on all companies – for example, it is possible that the executive compensation changes may be expanded to all companies, whether or not they have accepted (or were even eligible for) TARP Capital.

That’s our belief.  We’d love to hear yours in the comments.

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