The FDIC is developing guidance for examiners on how to assess the use of funds received by state nonmember banks under the Troubled Asset Relief Program (“TARP”) and other federal initiatives. The new guidelines, outlined in testimony by FDIC Chief Operating Officer John F. Bovenzi before the House Financial Services Committee, will signify the most direct effort by regulators to date on how to determine the way in which banks are using TARP funds. The examiner guidance will focus on banks’ use of capital injections under the Capital Purchase Program (“CPP”) and how their capital subscription was used to promote lending and encourage foreclosure prevention efforts. Examiners of FDIC-regulated institutions will be tasked with consideration of these issues when assigning CAMELS composite component ratings.
On November 12, 2008, the federal banking regulators issued an Interagency Statement on Meeting the Needs of Creditworthy Borrowers, which urges banks to:
- lend prudently and responsibly to creditworthy borrowers;
- work with borrowers to preserve homeownership and avoid preventable foreclosures;
- adjust dividend policies to preserve capital and lending capacity; and
- employ compensation structures that encourage prudent lending.
The November 12 Interagency Statement emphasized that adherence to these standards would be reflected in examination ratings both for safety and soundness and compliance criteria.
On January 12, 2009, the FDIC took another step to ensure accountability among state nonmember banks by issuing a Financial Institutions Letter advising banks to track their use of capital injections, liquidity support and/or financing guarantees obtained through recent financial stability programs. The Financial Institutions Letter also encouraged insured institutions to include information about their use of the funds in public reports, such as shareholder reports and financial statements. FDIC examiners will be reviewing the expectations established in the recent Financial Institution Letter for banks participating in the CPP, including:
- establishment of a monitoring process for the use of TARP funds to determine the primary uses by the institution of received funds;
- increased lending efforts in the institution’s market since receiving TARP funds;
- down-streaming TARP funds to the depository institution (if a holding company structure exists) to ensure that funds can intermediated into loans and to augment bank capital;
- engagement in mortgage loan modification or foreclosure prevention efforts that rely on systematic, proactive approaches that enhance the net present value of individual mortgage loans versus foreclosure;
- utilization of executive compensation programs that exemplify good corporate governance and conform with TARP requirements; and
- implementation of the goals of the November 12 Interagency Statement to meet the needs of creditworthy borrowers in the bank’s market area.
It is likely that other federal banking regulatory agencies will develop similar guidance.