Banks returning bailout funds must sever ties to FDIC
WASHINGTON - Banks that want to pay back their federal bailout funds and free themselves from government restrictions on compensation and dividends will have to sever their ties to another financial assistance program.
Financial firms eager to return infusions from the $700 billion Troubled Asset Relief Program will have to demonstrate that they can operate without debt guarantees provided by the Federal Deposit Insurance Corp., a senior government official said.
The FDIC program allows financial institutions to borrow money at lower costs. As of Monday, banks had $332.4 billion in debt outstanding under the FDIC's program, which does not impose the same restrictions as TARP.
The new requirement will make it harder for some institutions to get out from under government rules attached to the bailouts, another shift in a changing landscape for banks. It also illustrates the government's desire not to have banks abandon the bailout program if they are not financially prepared to do so.
The official spoke on condition of anonymity because the standards have not been made public. The Treasury and the Federal Reserve are expected to issue TARP repayment guidelines, a response to banks that want to get out from under bailout conditions.
The FDIC program, designed to increase liquidity to get banks to make loans, is financed through fees assessed to participating institutions. The program covers debt issued though October of this year. The FDIC's chairwoman, Sheila Bair, has said the program has collected $7 billion in premiums and does not expect to have any losses. The FDIC does not identify institutions that issue debt under the program, though banks that participate disclose in their financial statements.
An FDIC spokesman said the agency does not assess how much banks save by issuing guaranteed debt, though some private estimates place the savings at about 2 percentage points in annual interest costs.
By linking the two programs, the government could motivate banks to cut themselves off from the various assistance programs that it put in place to unclog credit and free up lending in the midst of the financial crisis.
The bailout program has been unpopular in Congress and prompted a new round of conditions earlier this year following news reports about lavish spending on perks, retreats and corporate planes.
