Treasury Unveils Program to Pump Private Capital Into Banks

In an effort to attract private capital back into the banking system, the Treasury plans to allow firms to introduce preferred shares that can be converted into common stock as part of its new Capital Assistance Program (CAP).

According to the Treasury Department, the program allows banks the "opportunity to turn first to private sources of capital, should additional capital buffers be deemed necessary for a financial institution."

The preferred shares will carry a 9% dividend yield and can be converted into common equity at a 10% discount to the price, the Treasury said.

Securities that have not been converted over a seven year horizon will automatically be turned into common equity.

The Treasury Department also said all firms participating in the program will be subject to the terms of the Economic Stabilization Act of 2008, including restrictions on paying quarterly dividends, repurchasing shares and pursuing cash acquisitions.

In a join announcement, Federal regulators including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency Office of Thrift Supervision said they would begin conducting a series of stress tests on firms with assets exceeding $100 billion as part of a means to gauge the necessity of more capital by financial institutions in a worst-case scenario.

The stress tests are expected to be completed by April 2009.

By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2009