On June 1, 2009, the Federal Reserve announced the standards that the Federal Reserve would apply in determining whether the nineteen largest bank holding companies (the “Stress Test” participants) would be permitted to redeem their outstanding TARP Capital Purchase Program securities.

Under the TARP Capital Purchase Program, an institution may seek to redeem the TARP investment at any time, subject to the approval of the institution’s primary federal regulator.  While institutions were initially limited in their ability to redeem the TARP investment during its first three years, Congress removed that limitation under the American Recovery and Reinvestment Act of 2009.  As of June 1, 2009, 20 institutions had redeemed their TARP Capital Purchase Program investment.  The Federal Reserve announced that the first approvals for redemptions by the nineteen largest bank holding companies would be announced during the week of June 8, 2009.

The Federal Reserve announced seven standards for whether it will permit the nineteen largest bank holding companies to redeem their TARP Capital Purchase Program investments:

  • ability to access the long-term debt markets without reliance on the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program;
  • ability to access to public equity markets;
  • ability, post-redemption, to remain in a position to continue to fulfill its role as an intermediary that facilitates lending to creditworthy households and businesses;
  • ability, post-redemption, to maintain capital levels that are consistent with supervisory expectations;
  • ability, post-redemption, to continue to serve as a source of financial and managerial strength and support to its subsidiary bank(s);
  • ability, post-redemption, to meet ongoing funding requirements and its obligations to counterparties while reducing reliance on government capital and the TLGP; and
  • a robust longer-term capital assessment and management process geared toward achieving and maintaining a prudent level and composition of capital commensurate with the BHC’s business activities and firm-wide risk profile.

While these standards currently apply only to the nineteen largest bank holding companies, some of the standards are likely serve as a general indication of how the federal banking agencies will generally handle redemptions on a going forward basis.  However, some of the standards are likely unique to the Stress Test participants.  For example, the requirements to access the long-term debt and public equity markets has not been required of other TARP Capital Purchase Program participants seeking to redeem.