The U.S. Department of the Treasury, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve Board have issued a joint statement regarding the Capital Assistance Program (CAP) that Treasury Secretary Timothy Geithner announced as part of the Financial Stability Program.
In their statement, the groups emphasized that should government-mandated stress tests find a financial institution to be undercapitalized, the institution should first turn to private sources of capital.
"Otherwise, the temporary capital buffer will be made available from the government," the groups wrote. "This additional capital does not imply a new capital standard, and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger-than-expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers."
The groups add that in order to enable institutions to maintain the quality of their capital, government capital will be in the form of mandatory convertible preferred shares, "which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory."
Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for mandatory convertible preferred shares, according to the statement.
SOURCES: Treasury, FDIC, OCC, OTS, Federal Reserve