On November 12, 2008, the FDIC, Federal Reserve, OTS, and OCC jointly issued an Interagency Statement on Meeting the Needs of Creditworthy Borrowers. This new release is a broad statement that covers both lending practices and restructuring mortgages and addresses dividend policies and executive compensation. We encourage every bank CEO to carefully review this Interagency Statement as an initial glimpse into the direction that the federal banking regulators appear to be headed.
As we’ve previously noted in our commentary, we believe that any future regulations will be placed on the industry as a whole and not merely on those that participate in the TARP Capital program. We believe this Interagency Statement lends credence to our position. While the Interagency Statement initially notes the Treasury’s program to make new capital widely available, the Interagency Statement provides that “it is imperative that all banking organizations and their regulators work together to ensure the needs of creditworthy borrowers are met,” and that “each individual banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss mitigation strategies and foreclosure prevention and reassess the incentive implications of its compensation policies.”
For bankers already planning to participate in the TARP Capital program, this Interagency Statement may provide some guidance (and comfort) as to what the regulators will expect regarding expansion of the flow of credit and modification of residential mortgages.
For bankers who were not planning to participate in the TARP Capital program, this Interagency Statement may lead to a reconsideration of the relative risks of participating versus not participating.
When the Treasury announced the TARP Capital program on October 14, 2008, the program was available to those that “elect to participate before 5:00 pm (EDT) on November 14, 2008.”
On October 31, 2008, Treasury announced that the deadline was only for “publicly traded eligible institutions” and that Treasury would establish “a reasonable deadline for private institutions to apply.”
On November 10, 2008, Interim Assistant Secretary Neel Kashkari stated “The November 14 deadline will be extended for private banks so they have time to apply.”
So to whom does the deadline apply, and what does it mean?
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).