Treasury's Conditions for TARP Exit

Highlights include JPMorgan Chase & Co. (JPM), Goldman Sachs Group, Inc. (GS), Bank of New York Mellon (BK), BB&T Corp. (BBT) and Northern Trust Corp. (NTRS).

In a joint statement issued last evening, the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) provided the guidelines to the banks seeking to return the TARP funds. The release can be seen here.

In addition to meeting the enhanced capital requirements (determined by the stress tests), the banks will have to prove that they can borrow money without the support of the FDIC's TLGP (Temporary Liquidity Guarantee Program). TLGP was created by the FDIC in October 2008, through which it provides insurance on debt issued by the Banks, for a small fee.

Banks have benefited a lot from this program as they are able to borrow cheaply and further the program was launched when the credit markets were virtually frozen. Banks currently have $332.5 billion of debt outstanding under this program.

As we had stated in our blog "Banks Don't Need Government Help, Really?" many banks have been trying to return TARP money, mainly due to strict conditions on executive compensation, whereas the fact is that these same banks are enjoying tremendous benefits from some other lesser-known Government programs that come without any attached strings such as FDIC's TLGP and Fed's emergency lending programs. The condition set now will ensure that the weaker banks do not return the TARP money just to avoid strict conditions and greater oversight by the Congress.

JP Morgan Chase (JPM), Goldman Sachs (GS), Bank of New York Mellon (BK), BB&T (BBT) and Northern Trust (NTRS) have recently issued some debt without the FDIC's guarantee, whereas most others have continued to rely on FDIC's support.

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