The Federal Reserve discusses bailout repayment rules

Posted Jun 2nd 2009 9:40AM by Mark Fightmaster
Filed under: Federal Reserve, Financial Crisis

On Monday, the Federal Reserve decided to outline rules for banks seeking to repay bailout funds. The rules apply to the 19 largest banks in the country that have received $228.6 billion of the Treasury's $700 billion financial bailout package.

This announcement is part of an attempt to slow all government support of banks. Banks are trying to distance themselves from the rules attached to the bailout money, which include limits on executive compensation. The banks have to apply to their primary regulators for permission in order to repay the money.

The first round of approvals are expected from the Treasury next week. In addition, the banks must "persuade" regulators that they will be able to continue to lend to creditworthy borrowers and will be able to maintain the minimum capital levels outlined under the stress tests. The banks also must be able to meet funding obligations to business partners while "reducing reliance on government capital" and the FDIC guarantee.

Last month, the Fed's stress tests showed that 10 of the 19 banks needed to raise $75 billion in capital in order to withstand any potential future losses. Since then, those banks have been trying to raise the capital needed. The Fed would like the banks to keep the extra money, just in case there are any future problems. The central bank would also like to "pull back" other forms of support from banks that do not require the support.

Tags: bank lending, banks, inthenews, TARP