In a speech to the Georgetown Business School on January 13, 2009, Treasury Assistant Secretary Kashkari made several comments regarding how banks were using TARP Capital funds, and why the Treasury does not believe that further requirements are necessary. In light of continued political pressure to force banks to increase lending (or otherwise specify how to use the TARP Capital funds), we provide the highlights of Kashkari’s remarks on this matter.
Specifically, Kashkari noted that banks have strong economic incentives to deploy any TARP Capital received by the institution. “Banks are in the business of lending and they will provide credit to sound borrowers whenever possible. If a bank doesn’t put the new capital to work earning a profit or reducing a loss, its returns for its shareholders will suffer.” In other words, Treasury is relying on the fundamental tenant of capitalism that banks will act in their own self-interest to make creditworthy loans.
Kashkari notes that we are still at a point of low confidence, and that as long as confidence remains low, banks will remain cautious about making loans and consumers and businesses will remain cautious of taking on new loans. Until confidence returns, we are unlikely to see significantly more credit extended. “We must not attempt to force them to make loans whose risks they are not comfortable with. Bad lending practices were at the root cause of this crisis. Returning to those practices will not held end this financial turmoil.”
With regard to tracking lending activity, Kashkari indicated that Treasury intends to use the existing quarterly call reports to study changes in balance sheets (and to compare against institutions that did not receive TARP Capital). Treasury also plans to supplement call report information with monthly data collection from the largest banks.
On January 13, 2009, Treasury Assistant Secretary Kashkari announced that the Treasury has completed a term sheet for Subchapter S corporations to participate in the TARP Capital Purchase Program. He stated that the term sheet for Subchapter S corporations will be posted on the Treasury website on Wednesday, January 14, 2009. The application period is expected to open at that time and remain open for 30 days.
In comments today at the SIFMA Summit, Interim Assistant Secretary for Financial Stability, Neel Kashkari, gave an update on the Treasury Department’s implementation of the TARP Capital program. As noted by Mr. Kashkari, the TARP Capital program was announced just days ago, and while much work remains to be done, incredible progress has been made in implementing the program so far.
Two Policy Objectives
Mr. Kashkari emphasized two policy objectives:
- The TARP Capital program is intended to strengthen our financial system by increasing the capital base of a broad array of institutions.
- The TARP Capital program aims to increase the flow of financing to businesses and consumers to support our economy.
Application Timing and Availability of Funds
Mr. Kashkari noted that Treasury believes there is sufficient capital allocated for all qualifying institutions and emphasized that the program is not being implemented on a first-come, first-served basis. Mr. Kashkari also emphasized that the Treasury is working hard to finalize and publish the required legal documents so private banks can participate on the same economic terms as public banks. He noted that the deadline will be extended for private banks.
Read more about Increased Bank Lending and the Evaluation Process