Government ownership of banks possible, asserts Tarp board

According to a report released today by the Financial Stability Oversight Board, the government has the potential to take a major ownership stake in banks via the Capital Assistance Program (Cap), which was designed to provide capital to ailing banks through share purchases.

The board noted, however, that ownership of the banks was not the objective of the programme and that if the Treasury did acquire an ownership stake in an institution it would be "as temporary as possible" and that it would "encourage the return of private capital to replace the government investment".

In the past, the government has emphasised that, despite its willingness to take further stakes in the nation's banks, it had no intention of nationalising them. "Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands," the Treasury stated on February 23. Following increasing public disapproval of bail-out programmes, the report also emphasised that capital investments made by the Treasury would be placed in a separate entity known as the Financial Stability Trust created to manage the government's investment in US banking institutions.

The report also outlined specifics of how the government would offload ownership of banks if it ended up acquiring a substantial portion of the outstanding common shares of an institution via the Cap programme. "The Treasury will use reasonable efforts to sell at least 20% of any common equity it acquires each year," the report noted. The level of specificity provided marks a departure from earlier government commentary on the nature of its financial stability programmes. Previous statements addressing the return of institutions to private control have been vague: in a speech introducing the Financial Stability Plan on February 10, Treasury secretary Timothy Geithner stated that any government assistance provided "will come with terms that should encourage the institutions to replace public assistance with private capital as soon as possible".

The report also noted that in the three-month period ending on March 27, 250 banks who had received approval from the Treasury to participate in its Capital Purchase Program (CPP) had withdrawn their applications. Many have speculated that banks have been eager to pay back Troubled Assets Relief Program (Tarp) funds to escape regulatory scrutiny tied in with government financial assistance.

The board said it was concerned that the withdrawals might hamper government efforts to stimulate financial markets. "To the extent that such withdrawals reflect a wariness of qualifying financial institutions to seek or receive capital under the Tarp, the actions run counter to the purposes of the CPP, which are to make capital available to broad segments of the banking industry in order to promote stability, public confidence in the financial system and support lending to households and businesses."

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