Today, the Federal Reserve Board outlined the criteria it will use to evaluate applications to redeem U.S. Treasury capital from the 19 bank holding companies (BHC) that participated in the Supervisory Capital Assessment Program (SCAP). As previously provided in the Capital Purchase Program (CPP) term sheet and other documentation, any banking organization wishing to redeem U.S. Treasury capital must first obtain approval from its primary federal regulator, which then forwards approved applications to the Treasury Department. In addition, the Federal Reserve previously announced in connection with the SCAP that a participating BHC must also demonstrate an ability to access the long-term debt markets without reliance on the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP).

Certain of the additional critiera set forth by the Federal Reserve below seems to be rather broad and a somewhat vague compared to the detailed FAQ guidance provided by Treasury for redeeming Treasury capital. When considering an application to redeem Treasury capital, the Federal Reserve will also consider whether:  

  • the BHC can redeem its Treasury capital and remain in a position to continue to fulfill its role as an intermediary that facilitates lending to creditworthy households and businesses (Treasury specifically requires supervisors to carefully weigh an institution’s desire to redeem outstanding CPP preferred stock against the contribution of Treasury capital to the institution’s overall soundness, capital adequacy, and ability to lend, including confirming that the institution has a comprehensive internal capital assessment process);
  • after redeeming its Treasury capital, the BHC will be able to maintain capital levels that are consistent with supervisory expectations (Treasury specifically requires a post-repayment capital base at least consistent with the SCAP buffer);  
  • the BHC will be able to continue to serve as a source of financial and managerial strength and support to its subsidiary bank(s) after the redemption; and  
  • the BHC and its bank subsidiaries will be able to meet their ongoing funding requirements and obligations to counterparties while reducing reliance on government capital and the TLGP (Treasury specifically requires the BHC to demonstrate its financial strength by issuing senior unsecured debt for a term greater than five years not backed by FDIC guarantees, in amounts sufficient to demonstrate a capacity to meet funding needs independent of government guarantees)