Troubled Asset Relief Program
Opportunities Exist to Apply Lessons Learned from the Capital Purchase Program to Similarly Designed Programs and to Improve the Repayment Process
Gao ID: GAO-11-47 October 4, 2010
Congress created the Troubled Asset Relief Program (TARP) to restore liquidity and stability in the financial system. The Department of the Treasury (Treasury), among other actions, established the Capital Purchase Program (CPP) as its primary initiative to accomplish these goals by making capital investments in eligible financial institutions. This report examines (1) the characteristics of financial institutions that received CPP funding and (2) how Treasury implemented CPP with the assistance of federal bank regulators. GAO analyzed data obtained from Treasury case files, reviewed program documents, and interviewed officials from Treasury and federal bank regulators.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
Mathew J. Scire
Team:
Government Accountability Office: Financial Markets and Community Investment
Phone:
(202) 512-6794
GAO-11-47, Troubled Asset Relief Program: Opportunities Exist to Apply Lessons Learned from the Capital Purchase Program to Similarly Designed Programs and to Improve the Repayment Process
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
October 2010:
Troubled Asset Relief Program:
Opportunities Exist to Apply Lessons Learned from the Capital Purchase
Program to Similarly Designed Programs and to Improve the Repayment
Process:
GAO-11-47:
GAO Highlights:
Highlights of GAO-11-47, a report to congressional committees.
Why GAO Did This Study:
Congress created the Troubled Asset Relief Program (TARP) to restore
liquidity and stability in the financial system. The Department of the
Treasury (Treasury), among other actions, established the Capital
Purchase Program (CPP) as its primary initiative to accomplish these
goals by making capital investments in eligible financial
institutions. This report examines (1) the characteristics of
financial institutions that received CPP funding and (2) how Treasury
implemented CPP with the assistance of federal bank regulators. GAO
analyzed data obtained from Treasury case files, reviewed program
documents, and interviewed officials from Treasury and federal bank
regulators.
What GAO Found:
Institutions that received capital under CPP were diverse and
generally exceeded eligibility guidelines, and while few institutions
have failed, concerns remain about the growing numbers of institutions
facing difficulties in paying dividend and interest payments to
Treasury. Institutions that participated in CPP included roughly equal
numbers of public and private firms of all sizes that were located
throughout the country (see figure on next page). About half of CPP
institutions that we reviewed were small”that is, had less than $500
million in risk-weighted assets. However, 25 of the largest firms
received almost 90 percent of all CPP funds, and 9 of those comprised
almost 70 percent of all funds. Approved institutions had similar
overall examination ratings from their regulators and generally were
rated as satisfactory. For example, almost all of the institutions we
reviewed had an overall examination rating that was satisfactory or
better. Many of the examination ratings were over 1 year old, but
Treasury and regulatory officials said they took various actions to
mitigate any limitations related to older examination results,
including using preliminary ratings from ongoing bank examinations.
Financial performance ratios that Treasury and regulators also used to
evaluate CPP applicants”such as risk-based capital and nonperforming
loan ratios”varied by institution but typically were well within
guidelines as defined by Treasury and regulatory capital standards.
Institutions generally were well above the minimum levels of
regulatory capital. However, we identified 66 institutions”12 percent
of the firms we reviewed”that exhibited weaker financial conditions
relative to those of other approved institutions, and Treasury or
regulators raised concerns about the viability of a few of these
institutions. For almost all of these weaker firms, Treasury or
regulators identified factors”such as management quality or
substantial capital levels”that mitigated the weaknesses and provided
additional support for the approval of the CPP investment. Four CPP
institutions have failed, but the number of firms exhibiting signs of
financial difficulty”such as missing their dividend or interest
payments”has increased over time. Specifically, the number of
institutions that have not made a scheduled dividend or interest
payment has increased from 8 for payments due in February 2009 to 123
for payments due in August 2010. Over this period, a total of 144
institutions did not make at least one payment by the end of the
reporting period in which they were due, for a total of 413 missed
payments. As of August 31, 2010, 79 institutions had missed three or
more payments and 24 had missed five or more. Through August 31, 2010,
the total amount of missed dividend and interest payments was $235
million, although some institutions made their payments after the end
of the reporting period.
The process Treasury established to invest in financial institutions
included internal control procedures for approved applicants that
enhanced consistency, but regulators‘ recommendations for application
withdrawals and investment repayments received less oversight.
Treasury relied on individual bank regulators to recommend applicants
that it would consider for CPP investments and provided regulators
with limited formal guidance on the factors to consider in evaluating
the applicants. Because of the limited nature of Treasury‘s guidance,
regulators used discretion and judgment in their assessments, which
created the potential for inconsistency across regulators. Applicants
that regulators recommended for approval received additional reviews
as they moved through Treasury‘s process. For some, this included a
review by a council of regulators and all recommended applicants were
reviewed by Treasury. These reviews promoted a more consistent
evaluation of recommendations made by different regulators. However,
regulators recommended that some applicants withdraw their
applications and these institutions may not have benefited from the
additional reviews if they withdrew their applications before reaching
the council or Treasury. Furthermore, the regional offices of some
regulators could”and did”recommend that applicants withdraw without
centralized review within the agency. Because Treasury did not monitor
which institutions regulators excluded from its program, or the
reasons for their decisions, it could not fully ensure that regulators
treated similar applicants consistently. Limited oversight of
withdrawal recommendations also may pose challenges to any future
Treasury program that may follow the CPP model, such as the Small
Business Lending Fund”an initiative to increase credit for small
businesses through capital investments in certain financial
institutions. Unless Treasury makes changes from the CPP model to
include monitoring of withdrawal recommendations, such new programs
may share the same increased risk of participants not being treated
equitably. Treasury is required by statute to allow recipients to
repay, subject to consultation with the federal banking regulators,
but as with withdrawal recommendations, Treasury does not monitor or
collect information or analysis supporting the regulators‘ decisions.
Regulators said that they evaluate repayment requests based on their
supervisory guidelines for capital reductions. Also, in the absence of
monitoring by Treasury, regulators have developed generally similar
guidelines for evaluating repayment requests and established processes
for coordinating repayment decisions that involve multiple regulators.
However, without collecting information on or monitoring different
regulators‘ repayment decisions, Treasury has no basis for determining
whether regulators evaluate similar institutions consistently and
cannot provide feedback to regulators on the consistency of their
decision making.
Figure: Number of Participants and Amount of CPP Investments, by
State, December 29, 2009:
[Refer to PDF for image: illustrated U.S. map and vertical bar graph]
Alabama:
Number of firms participating in CPP: 11;
CPP funds disbursed: $3.7 billion.
Alaska:
Number of firms participating in CPP: 1;
CPP funds disbursed: $0.004 billion.
Arizona:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.01 billion.
Arkansas:
Number of firms participating in CPP: 12;
CPP funds disbursed: $0.3 billion.
California:
Number of firms participating in CPP: 72;
CPP funds disbursed: $27.7 billion.
Colorado:
Number of firms participating in CPP: 12;
CPP funds disbursed: $0.2 billion.
Connecticut:
Number of firms participating in CPP: 7;
CPP funds disbursed: $3.8 billion.
Delaware:
Number of firms participating in CPP: 3;
CPP funds disbursed: $0.4 billion.
District of Columbia:
Number of firms participating in CPP: 1;
CPP funds disbursed: $0.006 billion.
Florida:
Number of firms participating in CPP: 23;
CPP funds disbursed: $0.3 billion.
Georgia:
Number of firms participating in CPP: 26;
CPP funds disbursed: $6.3 billion.
Hawaii:
Number of firms participating in CPP: 1;
CPP funds disbursed: $0.1 billion.
Idaho:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.1 billion.
Illinois:
Number of firms participating in CPP: 45;
CPP funds disbursed: $4.6 billion.
Indiana:
Number of firms participating in CPP: 17;
CPP funds disbursed: $0.7 billion.
Iowa:
Number of firms participating in CPP: 9;
CPP funds disbursed: $0.2 billion.
Kansas:
Number of firms participating in CPP: 17;
CPP funds disbursed: $0.1 billion.
Kentucky:
Number of firms participating in CPP: 12;
CPP funds disbursed: $0.2 billion.
Louisiana:
Number of firms participating in CPP: 13;
CPP funds disbursed: $0.5 billion.
Maine:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.1 billion.
Maryland:
Number of firms participating in CPP: 19;
CPP funds disbursed: $0.5 billion.
Massachusetts:
Number of firms participating in CPP: 11;
CPP funds disbursed: $2.4 billion.
Michigan:
Number of firms participating in CPP: 11;
CPP funds disbursed: $0.7 billion.
Minnesota:
Number of firms participating in CPP: 19;
CPP funds disbursed: $7.1 billion.
Mississippi:
Number of firms participating in CPP: 14;
CPP funds disbursed: $0.5 billion.
Missouri:
Number of firms participating in CPP: 32;
CPP funds disbursed: $0.9 billion.
Montana:
Number of firms participating in CPP: 0;
CPP funds disbursed: 0.
Nebraska:
Number of firms participating in CPP: 9;
CPP funds disbursed: $0.05 billion.
Nevada:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.1 billion.
New Hampshire:
Number of firms participating in CPP: 6;
CPP funds disbursed: $0.04 billion.
New Jersey:
Number of firms participating in CPP: 19;
CPP funds disbursed: $0.6 billion.
New Mexico:
Number of firms participating in CPP: 3;
CPP funds disbursed: $0.05 billion.
New York:
Number of firms participating in CPP: 25;
CPP funds disbursed: $80.2 billion.
North Carolina:
Number of firms participating in CPP: 31;
CPP funds disbursed: $28.7 billion.
North Dakota:
Number of firms participating in CPP: 3;
CPP funds disbursed: $0.1 billion.
Ohio:
Number of firms participating in CPP: 17;
CPP funds disbursed: $7.8 billion.
Oklahoma:
Number of firms participating in CPP: 5;
CPP funds disbursed: $0.1 billion.
Oregon:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.3 billion.
Pennsylvania:
Number of firms participating in CPP: 31;
CPP funds disbursed: $9.8 billion.
Puerto Rico:
Number of firms participating in CPP: 2;
CPP funds disbursed: $1.3 billion.
Rhode Island:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.03 billion.
South Carolina:
Number of firms participating in CPP: 20;
CPP funds disbursed: $0.6 billion.
South Dakota:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.04 billion.
Tennessee:
Number of firms participating in CPP: 24;
CPP funds disbursed: $1.3 billion.
Texas:
Number of firms participating in CPP: 30;
CPP funds disbursed: $3.1 billion.
Utah:
Number of firms participating in CPP: 3;
CPP funds disbursed: $1.4 billion.
Vermont:
Number of firms participating in CPP: 0;
CPP funds disbursed: 0.
Virginia:
Number of firms participating in CPP: 26;
CPP funds disbursed: $4.2 billion.
Washington:
Number of firms participating in CPP: 17;
CPP funds disbursed: $1.0 billion.
West Virginia:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.1 billion.
Wisconsin:
Number of firms participating in CPP: 21;
CPP funds disbursed: $2.5 billion.
Wyoming:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.01 billion.
Sources: GAO analysis of OFS data: Map Resources (map).
[End of figure]
What GAO Recommends:
If Treasury administers programs containing elements similar to those
of CPP, Treasury should implement a process for monitoring all
applicants that regulators recommend for withdrawal to ensure that
similar applicants are treated equitably. To improve monitoring of
regulators‘ decisions on CPP repayments, Treasury should periodically
collect and review information on the analysis supporting regulators‘
decisions and provide feedback for regulators‘ consideration on the
extent to which they are evaluating similar institutions consistently.
Treasury agreed to consider our recommendations. We also received
technical comments from the Federal Reserve, FDIC, OCC, and Treasury
and incorporated them as appropriate.
View [hyperlink, http://www.gao.gov/products/GAO-11-47] or key
components. For more information, contact Orice Williams Brown at
(202) 512-8678 or williamso@gao.gov.
[End of section]
Contents:
Letter:
Background:
CPP Institutions Were Diverse and with Some Exceptions Met CPP
Guidelines, but More Institutions Are Showing Signs of Financial
Difficulties:
While Treasury's Processes Included Multiple Reviews of Approved CPP
Applicants, Certain Operational Control Weaknesses Offer Lessons
Learned for Similarly Designed Programs:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Information on Processing Times for the Capital Purchase
Program:
Appendix III: Comments from the Department of the Treasury's Office of
Financial Stability:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Number of Institutions Participating in CPP That Exhibited
Weak Characteristics Prior to Approval:
Table 2: Mitigating Factors for Viability Concerns Identified by
Regulators or Treasury:
Table 3: Withdrawals by CPP Applicants before Submission to CPP
Council or Treasury as of December 31, 2009:
Table 4: Repayment Requests as of August 2010:
Figures:
Figure 1: Process for Accepting and Approving CPP Applications:
Figure 2: Number of Participants and Amount of CPP Investments by
State as of December 31, 2009:
Figure 3: CAMELS Overall and Component Ratings Used to Evaluate CPP
Institutions Funded through April 30, 2009:
Figure 4: Bank or Thrift and Holding Company Performance Ratios Used
to Evaluate CPP Institutions Funded through April 30, 2009:
Figure 5: Investment Repayment Process for CPP:
Abbreviations:
ALLL: allowance for loan and lease losses:
ARRA: American Recovery and Reinvestment Act of 2009:
CAMELS: capital, asset quality, management, earnings, liquidity, and
sensitivity to market risk:
CDCI: Community Development Capital Initiative:
CPP: Capital Purchase Program:
CRA: Community Reinvestment Act:
EESA: Emergency Economic Stabilization Act of 2008:
NCUA: National Credit Union Administration:
OCC: Office of the Comptroller of the Currency:
OFS: Office of Financial Stability:
OREO: other real estate owned:
OTS: Office of Thrift Supervision:
PFR: primary federal regulator:
QFI: qualified financial institution:
RWA: risk-weighted assets:
SBLF: Small Business Lending Fund:
SCAP: Supervisory Capital Assessment Program:
SIGTARP: Office of the Special Inspector General for TARP:
TARP: Troubled Asset Relief Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
October 4, 2010:
Congressional Committees:
From October 2008 through December 2009, the U.S. Department of the
Treasury (Treasury) invested over $200 billion in over 700 financial
institutions as part of government efforts to stabilize U.S. financial
markets and the economy.[Footnote 1] These investments were made
through the Capital Purchase Program (CPP), which was the initial and
largest initiative under the Troubled Asset Relief Program (TARP).
[Footnote 2] Specifically, Treasury's authority under TARP enabled it
to buy or guarantee up to almost $700 billion of the "troubled assets"
that were deemed to be at the heart of the crisis, including mortgages
and mortgage-based securities, and any other financial instrument
Treasury determined it needed to purchase to help stabilize the
financial system, including equities.[Footnote 3] Treasury created CPP
in October 2008 to provide capital to viable financial institutions
through the purchase of preferred shares and subordinated debt. In
return for its investments, Treasury would receive dividend or
interest payments and warrants.[Footnote 4] The program was closed to
new investments on December 31, 2009, after Treasury had invested a
total of $205 billion in 707 financial institutions over the life of
the program. Since then, Treasury has continued to oversee its
investments and collect dividend and interest payments. Some
participants have repurchased their preferred shares or subordinated
debt and left the program with the approval of their primary bank
regulators.
Treasury has stated that it used CPP investments to strengthen
financial institutions' capital levels rather than the purchases of
troubled mortgage-backed securities and whole loans as initially
envisioned under TARP because it saw these investments as a more
effective mechanism to stabilize financial markets, encourage
interbank lending, and increase confidence in lenders and investors.
Treasury envisioned that the strengthened capital positions of viable
financial institutions would enhance confidence in the institutions
themselves and the financial system overall and increase the
institutions' capacity to undertake new lending and support the
economy. Financial institutions interested in receiving CPP
investments sent their applications directly to their primary federal
banking regulators, which did the initial evaluations. Institutions
were evaluated to determine their long-term strength and viability,
and weaker institutions were encouraged by their regulators to
withdraw their applications. The regulators provided Treasury's Office
of Financial Stability (OFS) with recommendations approving or denying
applications. OFS made the final decisions.
This report is based upon our continuing analysis and monitoring of
Treasury's process for implementing the Emergency Economic
Stabilization Act of 2008, (EESA), which provided GAO with broad
oversight authorities for actions taken under TARP and requires that
we report at least every 60 days on TARP activities and
performance.[Footnote 5] To fulfill our statutorily mandated
responsibilities, we have been monitoring and providing updates on
TARP programs, including CPP, in several reports. This report expands
on the previous work.[Footnote 6] Its objectives are to (1) describe
the characteristics of financial institutions that received CPP
funding, and (2) assess how Treasury, with the assistance of federal
bank regulators, implemented CPP.
To meet the report's objectives, we reviewed Treasury's case files for
CPP institutions that were funded through April 30, 2009, and other
supporting documentation such as records of meetings and transaction
reports. We collected and analyzed information from the case files,
including data on the characteristics of institutions that
participated in CPP, such as risk-weighted assets, examination
ratings, and selected financial ratios.[Footnote 7] We also gathered
information on the process that Treasury and regulators used to
evaluate CPP applications. We reviewed program documents and
interviewed officials from OFS who were responsible for processing
applications and repayment requests to obtain their views on CPP
implementation. Additionally, we interviewed officials from the four
federal banking regulators--the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Federal Reserve), and the
Office of Thrift Supervision (OTS)--to obtain information on their
process for reviewing CPP applications and repayment requests.
Further, we collected and reviewed program documents from the bank
regulators, including their policies and procedures, guidance
documents, and analysis summaries. Finally, we reviewed relevant laws
(e.g., EESA) as well as relevant reports by GAO, the Office of the
Special Inspector General for TARP (SIGTARP), the FDIC Office of
Inspector General, and the Federal Reserve Office of Inspector
General. This report is part of our coordinated work with SIGTARP and
the inspectors general of the federal banking agencies to oversee TARP
and CPP. The offices of the inspectors general of FDIC, Federal
Reserve, and Treasury and SIGTARP have all completed work or have work
under way at their respective agencies reviewing CPP's implementation.
In coordination with the other oversight agencies and offices and to
avoid duplication, we primarily focused our audit work (including our
review of agency case files) on the phases of the CPP process from the
point at which the regulators transmitted their recommendations to
Treasury.
We conducted this performance audit from May 2009 to September 2010 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
CPP was the primary initiative under TARP for stabilizing the
financial markets and banking system. Treasury created the program in
October 2008 to stabilize the financial system by providing capital on
a voluntary basis to qualifying regulated financial institutions
through the purchase of senior preferred shares and subordinated debt.
[Footnote 8] On October 14, 2008, Treasury allocated $250 billion of
the $700 billion in overall TARP funds for CPP but adjusted its
allocation to $218 billion in March 2009 to reflect lower estimated
funding needs based on actual participation and the expectation that
institutions would repay their investments. The program was closed to
new investments on December 31, 2009, and, in total, Treasury invested
$205 billion in 707 financial institutions over the life of the
program. Through June 30, 2010, 83 institutions had repaid about $147
billion in CPP investments, including 76 institutions that repaid
their investments in full.
Under CPP, qualified financial institutions were eligible to receive
an investment of between 1 and 3 percent of their risk-weighted
assets, up to a maximum of $25 billion.[Footnote 9] In exchange for
the investment, Treasury generally received shares of senior preferred
stock that were due to pay dividends at a rate of 5 percent annually
for the first 5 years and 9 percent annually thereafter.[Footnote 10]
In addition to the dividend payments, EESA required the inclusion of
warrants to purchase shares of common stock or preferred stock, or a
senior debt instrument to give taxpayers additional protection against
losses and an additional potential return on the investments.
Institutions are allowed to repay CPP investments with the approval of
their primary federal bank regulators and afterward to repurchase
warrants at fair market value.
While this was Treasury's program, the federal bank regulators played
a key role in the CPP application and approval process. The federal
banking agencies that were responsible for receiving and reviewing CPP
applications and recommending approval or denial were the:
* Federal Reserve, which supervises and regulates banks authorized to
do business under state charters and that are members of the Federal
Reserve System, as well as bank and financial holding
companies;[Footnote 11]
* FDIC, which provides primary federal oversight of any state-
chartered banks insured by FDIC that are not members of the Federal
Reserve System;
* OCC, which is responsible for chartering, regulating, and
supervising commercial banks with national charters; and:
* OTS, which charters federal savings associations (thrifts) and
regulates and supervises federal and state thrifts and savings and
loan holding companies.[Footnote 12]
Treasury, in consultation with the federal banking regulators,
developed a standardized framework for processing applications and
disbursing CPP funds. Treasury encouraged financial institutions that
were considering applying to CPP to consult with their primary federal
bank regulators.[Footnote 13] The bank regulators also had an
extensive role in reviewing the applications of financial institutions
applying for CPP and making recommendations to Treasury. Eligibility
for CPP funds was based on the regulator's assessment of the
applicant's strength and viability, as measured by factors such as
examination ratings, financial performance ratios, and other
mitigating factors, without taking into account the potential impact
of TARP funds. Institutions deemed to be the strongest, such as those
with the highest examination ratings, received presumptive approval
from the banking regulators, and their applications were forwarded to
Treasury. Institutions with lower examination ratings or other
concerns that required further review were referred to the interagency
CPP Council, which was composed of representatives from the four
banking regulators, with Treasury officials as observers. The CPP
Council evaluated and voted on the applicants, and applications from
institutions that received "approval" recommendations from a majority
of the regulatory representatives were forwarded to Treasury. Treasury
provided guidance to regulators and the CPP Council to use in
assessing applicants that permitted consideration of factors such as
signed merger agreements or confirmed investments of private capital,
among other things, to offset low examination ratings or other weak
attributes. Finally, institutions that the banking regulators
determined to be the weakest and ineligible for a CPP investment, such
as those with the lowest examination ratings, were to receive a
presumptive denial recommendation. Figure 1 provides an overview of
the process for assessing and approving CPP applications.
Figure 1: Process for Accepting and Approving CPP Applications:
[Refer to PDF for image: illustration]
Intake:
Qualified Financial Institution (QFI):
(A) Application submitted to one of the PFRs.
Primary Federal Regulators: Federal REserve; OCC; FDIC; OTS.
Evaluation:
Stages where follow-up and/or reconsideration are possible. QFIs may
contact regulators informally to inquire about their chances of
getting recommended for approval. Treasury may encourage QFIs to
withdraw applications before they are denied.
(B) Application reviewed and decision memo sent:
Presumptive approval recommendation: to:
Investment Committee (Treasury officials).
or:
Presumptive denial recommendation: to:
Capital Purchase Program Council; CPP Council is made up of
representatives from the primary federal regulators (PFR), with
Treasury officials as observers.
Investment Committee (Treasury officials): recommendation to:
Final decisions:
(C) Final decisions made:
Assistant Secretary for Financial Stability, Treasury.
Sources: GAO analysis; Treasury; Art Explosion (images).
Note: If the applicant was a bank holding company, an application was
submitted to both the applicant's holding company regulator and the
regulator of the largest insured depository institution controlled by
the applicant.
[End of figure]
The banking regulator or the CPP Council sent approval recommendations
to Treasury's Investment Committee, which comprised three to five
senior Treasury officials, including OFS's chief investment officer
(who served as the committee chair) and the assistant secretaries for
financial markets, economic policy, financial institutions, and
financial stability at Treasury. After receiving recommended
applications from regulators or the CPP Council, OFS reviewed
documentation supporting the regulators' recommendations but often
collected additional information from regulators and the council
before submitting applications to the Investment Committee. The
Investment Committee could also request additional analysis or
information in order to clear any concerns before deciding on an
applicant's eligibility. After completing its review, the Investment
Committee made recommendations to the Assistant Secretary for
Financial Stability for final approval. Once the Investment Committee
recommended preliminary approval, Treasury and the approved
institution initiated the closing process to complete the legal
aspects of the investment and disburse the CPP funds.
At the time of the program's announced establishment, nine major
financial institutions were initially included in CPP.[Footnote 14]
While these institutions did not follow the application process that
was ultimately developed, Treasury included these institutions because
federal banking regulators and Treasury considered them to be
essential to the operation of the financial system, which at the time
had effectively ceased to function. At the time, these nine
institutions held about 55 percent of U.S. banking assets and provided
a variety of services, including retail and wholesale banking,
investment banking, and custodial and processing services. According
to Treasury officials, the nine financial institutions agreed to
participate in CPP in part to signal the importance of the program to
the stability of the financial system. Initially, Treasury approved
$125 billion in capital purchases for these institutions and completed
the transactions with eight of them on October 28, 2008, for a total
of $115 billion. The remaining $10 billion was disbursed after the
merger of Bank of America Corporation and Merrill Lynch & Co., Inc.,
was completed in January 2009.
CPP Institutions Were Diverse and with Some Exceptions Met CPP
Guidelines, but More Institutions Are Showing Signs of Financial
Difficulties:
The institutions that received CPP capital investments varied in terms
of ownership type, location, and size. The 707 institutions that
received CPP investments were split almost evenly between publicly
held and privately held institutions, with slightly more private
firms.[Footnote 15] They included state-chartered and national banks
and U.S. bank holding companies located in 48 states, the District of
Columbia, and Puerto Rico (see figure 2). Most states had fewer than
20 CPP firms, but 13 states had 20 or more. California had the most,
with 72, followed by Illinois (45), Missouri (32), North Carolina
(31), and Pennsylvania (31). Montana and Vermont were the only 2
states that did not have institutions that participated in CPP.
Figure 2: Number of Participants and Amount of CPP Investments by
State as of December 31, 2009:
[Refer to PDF for image: illustrated U.S. map and vertical bar graph]
Alabama:
Number of firms participating in CPP: 11;
CPP funds disbursed: $3.7 billion.
Alaska:
Number of firms participating in CPP: 1;
CPP funds disbursed: $0.004 billion.
Arizona:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.01 billion.
Arkansas:
Number of firms participating in CPP: 12;
CPP funds disbursed: $0.3 billion.
California:
Number of firms participating in CPP: 72;
CPP funds disbursed: $27.7 billion.
Colorado:
Number of firms participating in CPP: 12;
CPP funds disbursed: $0.2 billion.
Connecticut:
Number of firms participating in CPP: 7;
CPP funds disbursed: $3.8 billion.
Delaware:
Number of firms participating in CPP: 3;
CPP funds disbursed: $0.4 billion.
District of Columbia:
Number of firms participating in CPP: 1;
CPP funds disbursed: $0.006 billion.
Florida:
Number of firms participating in CPP: 23;
CPP funds disbursed: $0.3 billion.
Georgia:
Number of firms participating in CPP: 26;
CPP funds disbursed: $6.3 billion.
Hawaii:
Number of firms participating in CPP: 1;
CPP funds disbursed: $0.1 billion.
Idaho:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.1 billion.
Illinois:
Number of firms participating in CPP: 45;
CPP funds disbursed: $4.6 billion.
Indiana:
Number of firms participating in CPP: 17;
CPP funds disbursed: $0.7 billion.
Iowa:
Number of firms participating in CPP: 9;
CPP funds disbursed: $0.2 billion.
Kansas:
Number of firms participating in CPP: 17;
CPP funds disbursed: $0.1 billion.
Kentucky:
Number of firms participating in CPP: 12;
CPP funds disbursed: $0.2 billion.
Louisiana:
Number of firms participating in CPP: 13;
CPP funds disbursed: $0.5 billion.
Maine:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.1 billion.
Maryland:
Number of firms participating in CPP: 19;
CPP funds disbursed: $0.5 billion.
Massachusetts:
Number of firms participating in CPP: 11;
CPP funds disbursed: $2.4 billion.
Michigan:
Number of firms participating in CPP: 11;
CPP funds disbursed: $0.7 billion.
Minnesota:
Number of firms participating in CPP: 19;
CPP funds disbursed: $7.1 billion.
Mississippi:
Number of firms participating in CPP: 14;
CPP funds disbursed: $0.5 billion.
Missouri:
Number of firms participating in CPP: 32;
CPP funds disbursed: $0.9 billion.
Montana:
Number of firms participating in CPP: 0;
CPP funds disbursed: 0.
Nebraska:
Number of firms participating in CPP: 9;
CPP funds disbursed: $0.05 billion.
Nevada:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.1 billion.
New Hampshire:
Number of firms participating in CPP: 6;
CPP funds disbursed: $0.04 billion.
New Jersey:
Number of firms participating in CPP: 19;
CPP funds disbursed: $0.6 billion.
New Mexico:
Number of firms participating in CPP: 3;
CPP funds disbursed: $0.05 billion.
New York:
Number of firms participating in CPP: 25;
CPP funds disbursed: $80.2 billion.
North Carolina:
Number of firms participating in CPP: 31;
CPP funds disbursed: $28.7 billion.
North Dakota:
Number of firms participating in CPP: 3;
CPP funds disbursed: $0.1 billion.
Ohio:
Number of firms participating in CPP: 17;
CPP funds disbursed: $7.8 billion.
Oklahoma:
Number of firms participating in CPP: 5;
CPP funds disbursed: $0.1 billion.
Oregon:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.3 billion.
Pennsylvania:
Number of firms participating in CPP: 31;
CPP funds disbursed: $9.8 billion.
Puerto Rico:
Number of firms participating in CPP: 2;
CPP funds disbursed: $1.3 billion.
Rhode Island:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.03 billion.
South Carolina:
Number of firms participating in CPP: 20;
CPP funds disbursed: $0.6 billion.
South Dakota:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.04 billion.
Tennessee:
Number of firms participating in CPP: 24;
CPP funds disbursed: $1.3 billion.
Texas:
Number of firms participating in CPP: 30;
CPP funds disbursed: $3.1 billion.
Utah:
Number of firms participating in CPP: 3;
CPP funds disbursed: $1.4 billion.
Vermont:
Number of firms participating in CPP: 0;
CPP funds disbursed: 0.
Virginia:
Number of firms participating in CPP: 26;
CPP funds disbursed: $4.2 billion.
Washington:
Number of firms participating in CPP: 17;
CPP funds disbursed: $1.0 billion.
West Virginia:
Number of firms participating in CPP: 4;
CPP funds disbursed: $0.1 billion.
Wisconsin:
Number of firms participating in CPP: 21;
CPP funds disbursed: $2.5 billion.
Wyoming:
Number of firms participating in CPP: 2;
CPP funds disbursed: $0.01 billion.
Sources: GAO analysis of OFS data: Map Resources (map).
[End of figure]
The total amount of CPP funds disbursed to institutions also varied by
state. The amount of CPP funds invested in institutions in most states
was less than $500 million, but institutions in 17 states received
more than $1 billion each. Institutions in states that serve as
financial services centers such as New York and North Carolina
received the most CPP funds.[Footnote 16] The median amount of CPP
funds invested in institutions by state was $464 million.
The size of CPP institutions also varied widely. The risk-weighted
assets of firms we reviewed that were funded through April 30, 2009,
ranged from $10 million to $1.4 trillion.[Footnote 17] However, most
of the institutions were relatively small. For example, about half of
the firms that we reviewed had risk-weighted assets of less than $500
million, and almost 70 percent had less than $1 billion. Only 30
percent were medium to large institutions (more than $1 billion in
risk-weighted assets). Because the investment amount was tied to the
firm's risk-weighted assets, the amount that firms received ranged
widely, from about $300,000 to $25 billion. The average investment
amount for all of the 707 CPP participants was $290 million, although
half of the institutions received less than $11 million. The 25
largest institutions received almost 90 percent of the total amount of
CPP investments, and 9 of these firms received almost 70 percent of
the funds.
Regulatory Examinations Found That the Financial Condition of Most CPP
Institutions Was At Least Satisfactory:
The characteristics Treasury and regulators used to evaluate
applicants indicated that approved institutions had bank or thrift
examination ratings that generally were satisfactory, or within CPP
guidelines.[Footnote 18] Treasury and regulators used various measures
of institutional strength and financial condition to evaluate
applicants. These included supervisory examination ratings and
financial performance ratios assessing an applicant's capital adequacy
and asset quality.[Footnote 19] While some examination results were
more than a year old, regulatory officials told us that they had taken
steps to mitigate the effect of these older ratings, such as
collecting updated information.
Examination Ratings:
Almost all of the 567 institutions we reviewed had overall examination
ratings for their largest bank or thrift that were satisfactory or
better (see figure 3).[Footnote 20] The CAMELS ratings range from 1 to
5, with 1 indicating a firm that is sound in every respect, 2 denoting
an institution that is fundamentally sound, and 3 or above indicating
some degree of supervisory concern. Of the CPP firms that we reviewed,
82 percent had an overall rating of 2 from their most recent
examination before applying to CPP, and an additional 11 percent had
the strongest rating. Seven percent had an overall rating of 3 and no
firms had a weaker rating. We also found relatively small differences
in overall examination ratings for institutions by size or ownership
type. For example, institutions that were above and below the median
risk-weighted assets of $472 million both had average overall ratings
of about 2. Also, public and private firms both had average overall
examination ratings of about 2.
Bank or thrift examination ratings for individual components--such as
asset quality and liquidity--exhibited similar trends. In particular,
each of the individual components had an average rating of around 2.
Institutions tended to have weaker ratings for the earnings component,
which had an average of 2.2, than for the other components, which
averaged between 1.8 and 1.9. Public and private institutions
exhibited similar results for the average component ratings, although
private institutions tended to have stronger ratings on all components
except for earnings and sensitivity to market risk. Differences in
average ratings by bank size also were small. For example, smaller
institutions had stronger average ratings for the capital and asset
quality components, but larger institutions had stronger average
ratings for earnings and sensitivity to market risk.
Figure 3: CAMELS Overall and Component Ratings Used to Evaluate CPP
Institutions Funded through April 30, 2009:
[Refer to PDF for image: stacked horizontal bar graph]
Component: Capital;
Rating: 1: 116;
Rating: 2: 422;
Rating: 4: 22;
Rating: 5: 0;
Rating: none: 7.
Component: Asset quality;
Rating: 1: 151;
Rating: 2: 316;
Rating: 4: 90;
Rating: 5: 3;
Rating: none: 7.
Component: Management;
Rating: 1: 87;
Rating: 2: 428;
Rating: 4: 43;
Rating: 5: 2;
Rating: none: 7.
Component: Earnings;
Rating: 1: 82;
Rating: 2: 306;
Rating: 4: 152;
Rating: 5: 20;
Rating: none: 7.
Component: Liquidity;
Rating: 1: 119;
Rating: 2: 403;
Rating: 4: 37;
Rating: 5: 0;
Rating: none: 8.
Component: Sensitivity to market risk;
Rating: 1: 143;
Rating: 2: 392;
Rating: 4: 24;
Rating: 5: 0;
Rating: none: 8.
Component: Composite;
Rating: 1: 63;
Rating: 2: 460;
Rating: 4: 40;
Rating: 5: 0;
Rating: none: 4.
Source: GAO analysis of OFS documentation.
Note: The dates of CAMELS examination ratings span from December 2006
to December 2008. Dates were missing for 104 of the institutions that
we reviewed. Institutions were identified as having no rating if we
did not find the information in our review of Treasury's case files.
This does not necessarily indicate that the institution had no
examination rating. Some newly chartered institutions (de novos) did
not have examination ratings completed at the time of the application.
[End of figure]
Holding companies receiving CPP investments typically also had
satisfactory or better examination ratings. The Federal Reserve uses
its own rating system when evaluating bank holding companies.[Footnote
21] Almost 80 percent of holding companies receiving CPP funds had an
overall rating of 2 (among those with a rating), and an additional 14
percent had an overall rating of 1. The individual component ratings
for holding companies (for example, for risk management, financial
condition, and impact) also were comparable with overall ratings, with
most institutions for which we could find a rating classified as
satisfactory or better. Specifically, over 90 percent of the ratings
for each of the components were 1 or 2, with most rated 2.
Many examination ratings were more than a year old, a fact that could
limit the degree to which the ratings accurately reflect the
institutions' financial condition, especially at a time when the
economy was deteriorating rapidly. Specifically, about 25 percent of
examination ratings were older than 1 year prior to the date of
application, and 5 percent were more than 16 months old. On average,
examination ratings were about 9 months older than the application
date. Regulators used examination ratings as a key measure of an
applicant's financial condition and viability, and the age of these
ratings could affect how accurately they reflect the institutions'
current state. For example, assets, liabilities, and operating
performance generally are affected by the economic environment and
depend on many factors, such as institutional risk profiles. Stressed
market conditions such as those existing in the broad economy and
financial markets during and before CPP implementation could be
expected to have negative impacts on many of the applicants, making
the age of examination ratings a critical factor in evaluating the
institutions' viability. Further, some case decision files for CPP
firms were missing examination dates. Specifically, 104 applicants'
case decision files out of the 567 we reviewed lacked a date for the
most recent examination results.
Treasury and regulatory officials told us that they took various
actions to collect information on applicants' current condition and to
mitigate any limitations of older examination results. Efforts to
collect additional information on the financial condition of
applicants included waiting for results of scheduled examinations or
relying on preliminary CAMELS exam results, reviewing quarterly
financial results such as recent information on asset quality, and
sometimes conducting brief visits to assess applicants' condition.
Officials from one regulator explained that communication with the
agency's regional examiners and bank management on changes to the
firm's condition was the most important means of allaying concerns
about older examination results. However, officials from another
regulator stated that they did use older examination ratings,
depending on the institution's business model, lending environment,
banking history, and current loan activity. For example, the officials
said they would use older ratings if the institution was a small
community bank with a history of conservative underwriting standards
and was not lending in a volatile real estate market.
As with the examination ratings, almost all of the institutions we
reviewed had a rating for compliance with the Community Reinvestment
Act (CRA) of satisfactory or better.[Footnote 22] Over 80 percent of
firms received a satisfactory rating and almost 20 percent had an
outstanding rating. Only two institutions had an unsatisfactory
rating. Average CRA ratings also were similar across institution types
and sizes.
Performance Ratios:
Performance ratios for the CPP firms we reviewed varied but typically
were well within CPP guidelines. In assessing CPP applicants, Treasury
and regulators focused on a variety of ratios based on regulatory
capital levels, and institutions generally were well above the minimum
required levels for these ratios.[Footnote 23] Regulators generally
used performance ratio information from regulatory filings for the
second or third quarters of 2008. Two of these ratios are based on a
key type of regulatory capital known as Tier 1, which includes the
core capital elements that are considered the most reliable and
stable, primarily common stock and certain types of preferred stock.
Specifically, for the Tier 1 risk-based capital ratio, banks or
thrifts and holding companies had average ratios that were more than
double the regulatory minimum of 4 percent with only one firm below
that minimum level. Further, only two institutions were below 6.5
percent (see figure 4).[Footnote 24] Although almost all firms had
Tier 1 risk-based capital ratios that exceeded the minimum level, the
ratios ranged widely, from 3 percent to 43 percent.[Footnote 25]
Similarly, banks or thrifts and holding companies had average Tier 1
leverage ratios that were more than double the required 4 percent, and
only 3 firms were below 4 percent.[Footnote 26] The ratios also ranged
widely, from 2 percent to 41 percent. Finally, for the total risk-
based capital ratio, banks or thrifts and holding companies had
average ratios of 12 percent, well above the 8 percent minimum, and
only two firms were below 8 percent.[Footnote 27] These ratios ranged
from 4 percent to 44 percent.
Asset-based performance ratios for most CPP institutions also
generally remained within Treasury's guidelines, although more firms
did not meet the criteria for these ratios than did not meet the
criteria for capital ratios. Treasury and the regulators established
maximum guideline amounts for the three performance ratios relating to
assets that they used to evaluate applicants. These ratios measure the
concentration of troubled or risky assets as a share of capital and
reserves--classified assets, nonperforming loans (including non-
income-generating real estate, which is typically acquired through
foreclosure), and construction and development loans. For each of
these performance ratios, both the banks or thrifts and holding
companies had average ratios that were less than half of the maximum
guideline, well within the specified limits. For example,
banks/thrifts and holding companies had average ratios of 25 and 32
percent, respectively, for classified assets, which had a maximum
guideline of 100 percent. The substantial majority of banks or thrifts
and holding companies also were well below the maximum guidelines for
the asset ratios. For example, almost 90 percent of banks/thrifts and
over 80 percent of holding companies had classified assets ratios
below 50 percent. However, while only 3 firms missed the guidelines
for any of the capital ratios, 38 banks/thrifts and holding companies
missed the nonperforming loan ratio, 8 missed the construction and
development loan ratio, and 1 missed the classified assets ratio.
Figure 4: Bank or Thrift and Holding Company Performance Ratios Used
to Evaluate CPP Institutions Funded through April 30, 2009:
[Refer to PDF for image: 4 horizontal bar graphs]
Bank or thrift: Capital:
Tier 1 risk-based capital:
Range: 2.9-43.4%;
Mean: 11.1%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
4%.
Total risk-based capital:
Range: 3.7-44.3%;
Mean: 12.4%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
8%.
Tier 1 leverage ratio:
Range: 1.7-41.3%;
Mean: 9.2%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
4%.
Bank or thrift: Asset quality:
Classified assets ratio [Classed assets/(Net Tier 1 capital + ALLL)]:
Range: 0-105.0%;
Mean: 24.5%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
100%.
Nonperforming loan ratio [(NPLs+OREO)/(Net Tier 1 capital + ALLL)]:
Range: 0-66.7%;
Mean: 15.4%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
40%.
Construction and development loan ratio [Construction and development
loans/Total RBC:
Range: 0-359.0%;
Mean: 120.%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
300%.
Holding company: Capital:
Tier 1 risk-based capital:
Range: 6.0-18.5%;
Mean: 10.2%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
4%.
Total risk-based capital:
Range: 8.4-20.2%;
Mean: 12.0%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
8%.
Tier 1 leverage ratio:
Range: 3.6-18.9%;
Mean: 8.4%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
4%.
Holding company: Asset quality:
Classified assets ratio [Classed assets/(Net Tier 1 capital + ALLL)]:
Range: 0-85.9%;
Mean: 31.9%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
100%.
Nonperforming loan ratio [(NPLs+OREO)/(Net Tier 1 capital + ALLL)]:
Range: 0.1-59.6%;
Mean: 17.2%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
40%.
Construction and development loan ratio [Construction and development
loans/Total RBC:
Range: 2.1-305.2%;
Mean: 124.4%;
Regulatory criteria for adequately capitalized/Treasury CPP criteria:
300%.
Source: GAO analysis of OFS documentation.
Note: The dates of performance ratios for all but one bank and one
holding company were from 2008. The "allowance for loan and lease
losses" (ALLL) is an account maintained by financial institutions to
cover expected losses in their loan and lease portfolios. The "other
real estate owned" (OREO) is an account used for examination and
reporting purposes that primarily includes real estate owned by a
financial institution as a result of foreclosure.
[End of figure]
Treasury and Bank Regulators Took Steps to Help Ensure That CPP
Applicants Met Guidelines for Viability:
A small group of CPP participants exhibited weaker attributes relative
to other approved institutions (see table 1). For most of these cases,
Treasury or regulators described factors that mitigated the weaknesses
and supported the applicant's viability. Specifically, we identified
66 CPP institutions--12 percent of the firms we reviewed--that either
(1) did not meet the performance ratio guidelines used to evaluate
applicants, (2) had an unsatisfactory overall bank or thrift
examination rating, or (3) had a formal enforcement action involving
safety and soundness concerns.[Footnote 28] We use these attributes to
identify these 66 firms as marginal institutions, although the
presence of these attributes does not necessarily indicate that a firm
was not viable or that it was ineligible for CPP participation.
[Footnote 29] However, they generally may indicate firms that either
had weaker attributes than other approved firms or required closer
evaluation by Treasury and regulators. Nineteen of the institutions
met multiple criteria, including those that missed more than one
performance ratio for the largest bank/thrift or holding company. The
most common criteria for the firms identified as marginal was an
unsatisfactory overall examination rating or an unsatisfactory
nonperforming loan ratio. A far smaller number of firms exceeded the
construction and development loan ratio or had experienced a formal
enforcement action related to safety and soundness concerns. One bank
and two holding companies missed the capital or classified assets
ratios.
Table 1: Number of Institutions Participating in CPP That Exhibited
Weak Characteristics Prior to Approval:
Characteristic: Overall CAMELS bank examination rating of 3, 4, or 5;
Number of institutions exhibiting the characteristic: 40.
Characteristic: Active, formal safety-and-soundness-related
enforcement action;
Number of institutions exhibiting the characteristic: 5.
Characteristic: Tier 1 risk-based capital ratio less than 4 percent;
Number of institutions exhibiting the characteristic: 1.
Characteristic: Total risk-based capital ratio less than 8 percent;
Number of institutions exhibiting the characteristic: 1.
Characteristic: Tier 1 leverage ratio less than 4 percent;
Number of institutions exhibiting the characteristic: 3.
Characteristic: Classified assets ratio greater than 100 percent[A];
Number of institutions exhibiting the characteristic: 1.
Characteristic: Nonperforming loan ratio greater than 40 percent[B];
Number of institutions exhibiting the characteristic: 38.
Characteristic: Construction and development loans/total risk-based
capital ratio greater than 300 percent;
Number of institutions exhibiting the characteristic: 8.
Characteristic: Total institutions exhibiting characteristics;
Number of institutions exhibiting the characteristic: 66[C].
Source: GAO analysis of OFS documentation.
[A] Classified assets/(net Tier 1 capital + ALLL).
[B] (Nonperforming loans + OREO)/(Net Tier 1 capital + ALLL).
[C] Total does not add because 19 firms exhibited multiple
characteristics.
[End of table]
In their evaluations of CPP applicants, Treasury and regulators
documented their reasons for approving institutions with marginal
characteristics. They typically identified three types of mitigating
factors that supported institutions' overall viability: (1) the
quality of management and business practices; (2) the sufficiency of
capital and liquidity; and (3) performance trends, including asset
quality. The most frequently cited attributes related to management
quality and capital sufficiency.
High-quality management and business practices. In evaluating marginal
applicants, regulators frequently considered the experience and
competency of the applicants' senior management team. Officials from
one bank regulator said that they might be less skeptical of an
applicant's prospects if they believed it had high-quality management.
For example, they used their knowledge of institutions and the quality
of their management to mitigate economic concerns for banks in the
geographic areas most severely affected by the housing market decline.
Commonly identified strengths included the willingness and ability of
management to respond quickly to problems and concerns that regulators
identified such as poor asset quality or insufficient capital levels.
The evaluations of several marginal applicants described management
actions to aggressively address asset quality problems as an
indication of an institution's ability to resolve its weaknesses.
Regulators also had a positive view of firms whose boards of directors
implemented management changes such as replacing key executives or
hiring more experienced staff in areas such as credit administration.
Finally, regulators evaluated the quality of risk management and
lending practices in determining management strength.
Capital and liquidity. Regulators often reviewed the applicant's
capital and liquidity when evaluating whether an institution's
weaknesses might affect its viability. In particular, regulators and
Treasury considered the sufficiency of capital to absorb losses from
bad assets and the ability to raise private capital. As instructed by
Treasury guidance, regulators evaluated an institution's capital
levels prior to the addition of any CPP investment. Although an
institution might have high levels of nonperforming loans or other
problem assets, regulators' concerns about viability might be eased if
it also had a substantial amount of capital available to offset
related losses. Likewise, capital from private sources could shore up
an institution's capital buffers and provide a signal to the market
that it could access similar sources if necessary.
When evaluating the sufficiency of a marginal applicant's capital,
regulators also assessed the amount of capital relative to the firm's
risk profile, the quality of the capital, and the firm's dependence on
volatile funding sources. Institutions with a riskier business model
that included, for instance, extending high-risk loans or investing in
high-risk assets generally would require higher amounts of capital as
reserves against losses. Conversely, an institution with a less risky
strategy or asset base might need somewhat less capital to be
considered viable. Regulators reviewed the quality of a firm's capital
because some forms of capital, such as common shareholder's equity,
can absorb losses more easily than other types, such as subordinated
debt or preferred shares, which may have restrictions or limits on
their ability to take losses.[Footnote 30] Finally, regulators
considered the nature of a firm's funding sources. They viewed firms
that financed their lending and other operations with stable funding
sources, such as core deposit accounts or long-term debt, as less
risky than firms that obtained financing through brokered deposits or
wholesale funding, which could be more costly or might need to be
replaced more frequently.
Performance trends. Regulators also examined recent trends in
performance when evaluating marginal applicants. For example,
regulators considered strong or improving trends in asset quality,
earnings, and capital levels, among others, as potentially favorable
indicators of viability. These trends included reductions in
nonperforming and classified assets, consistent positive earnings,
reductions in commercial real estate concentrations, and higher net
interest margins and return on assets. In some cases, regulators
identified improvements in banks' performance through preliminary
examination ratings. Officials from one bank regulator stated that the
agency refrained from making recommendations until it had recent and
complete examination data. For example, if an examination was
scheduled for an applicant that had raised regulatory concerns or
questions, the agency would wait for the updated results before
completing its review and making a recommendation to Treasury.
Some Firms Were Approved despite Questions about Their Ongoing
Viability:
Regulators and Treasury raised specific questions about the viability
of a small number of institutions that ultimately were approved and
received their CPP investments between December 19, 2008, and March
27, 2009. Most of the questions about viability involved poor asset
quality, such as nonperforming loans or bad investments, and lending
that was highly concentrated in specific product types, such as
commercial real estate (see table 2). For these institutions, various
mitigating factors were used to provide support for the firm's
ultimate approval. For example, regulators and Treasury identified the
addition of private capital, strong capital ratios, diversification of
lending portfolios, and updated examination results as mitigating
factors in approving the institutions. One of these institutions had
weaker characteristics than the others, and regulators and Treasury
appeared to have more significant concerns about its viability.
Ultimately, regulators and the CPP Council recommended approval of
this institution based, in part, on criteria in Section 103 of EESA,
which requires Treasury to consider providing assistance to financial
institutions having certain attributes such as serving low-and
moderate-income populations and having assets less than $1 billion.
Table 2: Mitigating Factors for Viability Concerns Identified by
Regulators or Treasury:
Eligibility or viability concerns:
* Very high commercial real estate concentration;
* High construction and development loan concentration;
* State of bank's lending market;
* Poor performance ratios;
* Nonperforming loans;
* Precarious financial position;
* Elimination of capital by investment losses;
* Continual subpar management ratings;
* Questionable viability without CPP funds;
* Unsatisfactory management responsiveness;
* High commercial real estate exposure;
* Potential impairment in mortgage servicing assets;
* Viability of business plan given the current industry turmoil;
* Overall credit quality;
* Viability questionable without additional capital;
* Ability to improve operating performance;
* Proportion of non-owner-occupied commercial real estate.
Mitigating factors:
* Preliminary examination results;
* Relative strength of local market area;
* Management strong and conservative;
* Strong capital position;
* Bank committed to raising additional capital;
* Private capital investment;
* Aggressive in recognizing losses;
* Relatively strong capital ratios;
* Fannie Mae and Freddie Mac investment losses;
* Favorable capital treatment;
* Bank profitable with strong capital;
* Commercial real estate portfolio diversified by product type;
* Condition due to investment rather than loan losses;
* Conservative underwriting standards;
* Low construction and development loans;
* Special consideration based on provisions in statute;
* Approval conditioned upon planned issuance of additional equity
capital;
* Improved effectiveness of servicing rights hedging program;
* Recent examination rating of composite 2;
* Strong loan review and approval procedures;
* Low ratios of classified and nonperforming loans.
Source: GAO analysis of OFS documentation.
[End of table]
A Growing Number of CPP Firms, Including Many That Had Identified
Weaknesses, Have Exhibited Signs of Financial Difficulty:
Through July 2010, 4 CPP institutions had failed, but an increasing
number of CPP firms have missed their scheduled dividend or interest
payments, requested to have their investments restructured by
Treasury, or appeared on FDIC's list of problem banks.[Footnote 31]
First, the number of institutions missing the dividend or interest
payments due on their CPP investments has increased steadily, rising
from 8 in February 2009 to 123 in August 2010, or 20 percent of
existing CPP participants.[Footnote 32] Between February 2009 and
August 2010, 144 institutions did not pay at least one dividend or
interest payment by the end of the reporting period in which they were
due, for a total of 413 missed payments.[Footnote 33] As of August 31,
2010, 79 institutions had missed three or more payments and 24 had
missed five or more. Through August 31, 2010, the total amount of
missed dividend and interest payments was $235 million, although some
institutions made their payments after the scheduled payment date.
Institutions are required to pay dividends only if they declare
dividends, although unpaid cumulative dividends accrue and the
institution must pay the accrued dividends before making dividend
payments to other types of shareholders in the future, such as holders
of common stock. Federal and state bank regulators also may prevent
their supervised institutions from paying dividends to preserve their
capital and promote their safety and soundness. According to the
standard terms of CPP, after participants have missed six dividend
payments--consecutive or not--Treasury can exercise its right to
appoint two members to the board of directors for that institution. In
May 2010, the first CPP institution missed six dividend payments, but
as of August 2010, Treasury had not exercised its right to appoint
members to its board of directors. An additional seven institutions
missed their sixth dividend payment in August 2010. Treasury officials
told us that they are developing a process for establishing a pool of
potential directors that Treasury could appoint on the boards of
institutions that missed at least six dividend payments. They added
that these potential directors will not be Treasury employees and
would be appointed to represent the interests of all shareholders, not
just Treasury. Treasury officials expect that any appointments will
focus on banks with CPP investments of $25 million or greater, but
Treasury has not ruled out making appointments for institutions with
smaller CPP investments. We will continue to monitor and report on
Treasury's progress in making these appointments in future reports.
Although none of the 4 institutions that have failed as of July 31,
2010, were identified as marginal cases, 39 percent of the 66 approved
institutions with marginal characteristics have missed at least one
CPP dividend payment, compared with 20 percent of CPP participants
overall. Through August 2010, 26 of the 144 institutions that had
missed at least one dividend payment were institutions identified as
marginal. Of these 26 marginal approvals, 20 have missed at least two
payments, and 14 have missed at least four. Several of the marginal
approvals also have received formal enforcement actions since
participating in CPP. As of April, regulators filed formal actions
against nine of the marginal approvals, including four cease-and-
desist orders and four written agreements.[Footnote 34] Seven of these
institutions also missed at least one dividend payment. However, none
of the approvals identified as marginal had filed for bankruptcy or
were placed in FDIC receivership as of July 31, 2010.[Footnote 35]
Second, since June 2009, at least 16 institutions have formally
requested that Treasury restructure their CPP investments, and most of
the institutions have made their requests in recent months.[Footnote
36] Specifically, as of July, 9 of the 11 requests received this year
were received since April. Treasury officials said that institutions
have pursued a restructuring primarily to improve the quality of their
capital and attract additional capital from other investors. Treasury
has completed six of the requested restructurings and entered into
agreements with 2 additional institutions that made requests.
According to officials, Treasury considers multiple factors in
determining whether to restructure a CPP investment. These factors
include the effect of the proposed capital restructuring on the
institution's Tier 1 and common equity capital and the overall
economic impact on the U.S. government's investment. The terms of the
restructuring agreements most frequently involve Treasury exchanging
its CPP preferred shares for either mandatory convertible preferred
shares--which automatically convert to common shares if certain
conditions such as the completion of a capital raising plan are met--
or trust preferred securities--which are issued by a separate legal
entity established by the CPP institution.
Finally, the number of CPP institutions on FDIC's list of problem
banks has increased. At December 31, 2009, there were 47 CPP firms on
the problem list. This number had grown to 71 firms by March 31, 2010,
and to 78 at June 30, 2010. The FDIC tracks banks that it designates
as problem institutions based on their composite examination ratings.
Institutions designated as problem banks have financial, operational,
or managerial weaknesses that threaten their continued viability and
include firms with either a 4 or 5 composite rating.
While Treasury's Processes Included Multiple Reviews of Approved CPP
Applicants, Certain Operational Control Weaknesses Offer Lessons
Learned for Similarly Designed Programs:
Reviews of regulators' approval recommendations helped ensure
consistent evaluations and mitigate risk from Treasury's limited
guidance for assessing applicants' viability. Reviews of regulators'
recommendations to fund institutions are an important part of CPP's
internal control activities aimed at providing reasonable assurance
that the program is performing as intended and accomplishing its
goals.[Footnote 37] The process that Treasury and regulators
implemented established centralized control mechanisms to help ensure
consistency in the evaluations of approved applicants. For example,
regulators established their own processes for evaluating applicants,
but they generally had similar structures including initial contact
and review by regional offices followed by additional centralized
review at the headquarters office for approved institutions. FDIC,
OTS, and the Federal Reserve conducted initial evaluations and
prepared the case decision memos at regional offices (or Reserve Banks
in the case of the Federal Reserve), while the regulators'
headquarters (or Board of Governors) performed secondary reviews and
verification. At OCC, district offices did the initial analysis of
applicants and provided a recommendation to headquarters, which
prepared the case decision memo using input from the district. All of
the regulators also used review panels or officials at headquarters to
review the analyses and recommendations before submission to the CPP
Council or Treasury.
Applicants recommended for approval by regulators also received
further evaluation at the CPP Council or Treasury. Regulators sent to
the CPP Council applications that they had approved but that had
certain characteristics identified by Treasury as warranting further
review by the council. These characteristics included indications of
relative weakness, such as unsatisfactory examination ratings and
performance ratios. At the council, representatives from all four
federal bank regulators discussed the viability of applicants and
voted on recommending them to Treasury for approval. As Treasury
officials explained, the CPP Council was the deliberative forum for
addressing concerns about marginal applicants whose eligibility for
CPP was unclear. The council's charter describes its purpose as acting
as an advisory body to Treasury for ensuring that CPP guidelines are
applied effectively and consistently across bank regulators and
applicants. By requiring the regulators to reach consensus when
recommending applicants whose approval was not straightforward, the
CPP Council helped ensure that the final outcome of applicants was
informed by multiple bank regulators and generally promoted
consistency in decision making.
After regulators or the CPP Council submitted a recommendation to
Treasury, the applicant received a final round of review by Treasury's
CPP analysts and the Investment Committee. CPP analysts conducted
their own reviews of applicants and the case files forwarded from the
regulators, including the case decision memos. They collected
additional information for their reviews from regulators' data systems
and publicly available sources and also gathered information from
regulators to clarify the analysis in the case files. According to
Treasury officials, the CPP analysts were experienced bank examiners
serving on detail from each of the bank regulators except OCC.
Treasury officials explained that CPP analysts did not make decisions
about preliminary approvals or preliminary disapprovals. Only the
Investment Committee made those decisions.
In the final review stage, the Investment Committee evaluated all of
the applicants forwarded by regulators or the CPP Council. On the
basis of its review of the regulators' recommendations and analysis
and additional information collected by Treasury CPP analysts, the
Investment Committee recommended preliminary approval or denial to
applicants, subject to the final decision of the Assistant Secretary
for Financial Stability. By reviewing and issuing a preliminary
decision on all forwarded applicants, the Investment Committee
represented another important control, much like the CPP Council.
Unlike the CPP Council, however, the Investment Committee deliberated
on all applicants referred by regulators rather than just those
meeting certain marginal criteria.
The reviews by the CPP Council, analysts at OFS, and the Investment
Committee were important steps to limit the risk of inconsistent
evaluations by different regulators. This risk stemmed from the
limited guidance that Treasury provided to regulators concerning the
application review process. Specifically, the formal written guidance
that Treasury initially provided to regulators consisted of broad high-
level guidance, which was supplemented with other informal guidance to
address specific concerns.[Footnote 38] The written guidance provided
by Treasury established the institution's strength and overall
viability as the baseline criteria for the eligibility
recommendation.[Footnote 39] Regulators said that while the guidance
was useful in providing a broad framework or starting point for their
reviews, they could not determine an applicant's viability using
Treasury's written guidance alone. Officials from several regulators
said that they also relied on regulatory experience and judgment when
evaluating CPP applicants and making recommendations to Treasury.
Treasury officials told us that they believed they were not in a
position to provide more specific guidance to regulators on how to
evaluate the viability of the institutions they oversaw. Treasury
officials further explained that with many different kinds of
institutions and unique considerations, regulators needed to make
viability decisions on an individual basis.
A 2009 audit by the Federal Reserve's Inspector General (Fed IG)
assessing the Federal Reserve's process and controls for reviewing CPP
applications similarly found that Treasury provided limited guidance
in the early stages of the program regarding how to determine
applicants' viability.[Footnote 40] As a result, the Federal Reserve
and other regulators developed their own procedures for analyzing CPP
applications. The report also found that formal, detailed, and
documented procedures would have provided the Federal Reserve with
additional assurance that CPP applications would be analyzed
consistently and completely. However, the multiple layers of reviews
involving the regulators, the CPP Council, and Treasury staff helped
compensate for the risk of inconsistent evaluation of applicants that
received recommendations for CPP investments. The Fed IG recommended
that the Federal Reserve incorporate lessons learned from the CPP
application review process to its process for reviewing repurchase
requests. The Federal Reserve generally agreed with the report's
findings and recommendations.
Treasury and the Regulators' Documentation of Approval Decisions
Improved as the Program Matured:
As Treasury fully implemented its CPP process, it and the regulators
compiled documentation of the analysis supporting their decisions to
approve program applicants. For example, regulators consistently used
a case decision memo to provide Treasury with standard documentation
of their review and recommendations of CPP applicants. This document
contained basic descriptive and evaluative information on all
applicants forwarded by regulators, including identification numbers,
examination and compliance ratings, recent and post-investment
performance ratios, and a summary of the primary regulator's
evaluation and recommendation. Although the case decision memo
contained standard types of information, the amount and detail of the
information that regulators included in the form evolved over time.
According to regulators and Treasury, they engaged in an iterative
process whereby regulators included additional information after
receiving feedback from Treasury on what they should describe about
their assessment of an applicant's viability. For example, regulators
said that often Treasury wanted more detailed explanations for more
difficult viability decisions. According to bank regulatory officials,
other changes included additional discussion of specific factors
relevant to the viability determination, such as information on
identified weaknesses and enforcement actions, analysis of external
factors such as economic and geographic influences, and consideration
of nonbank parts of holding companies. Treasury officials explained
that as CPP staff learned about the types of information the
Investment Committee wanted to see, they would communicate it to the
regulators for inclusion in case decision memos.
Our review of CPP case files indicated that some case decision memos
were incomplete and missing important information, but typically only
for applicants approved early in the program. For instance, several
case decision memos contained only one or two general statements
supporting viability, largely for the initial CPP firms.[Footnote 41]
Eventually, the case decision memos included several paragraphs, and
some contained multiple pages, with detailed descriptions of the
applicant's condition and viability assessment. Most of the cases in
which the regulator did not explain its support for an applicant's
viability occurred in the first month of the program. Some case
decision memos lacked other important information, although these
memos also tended to be from early in the program. For example,
multiple case decision memos were missing either an overall
examination rating, all of the component examination ratings, or a
performance ratio related to capital levels. Most or all of those were
approved prior to December 2008. Further, 104 of 567 case files we
reviewed lacked examination ratings dates, and almost all of these
firms were approved before the end of December 2008. Missing CRA
dates, which occurred in 214 cases, exhibited a similar pattern.
For applications that regulators sent to Treasury with an approval
recommendation, Treasury staff used a "team analysis" form to document
their review before submitting the applications to the Investment
Committee for its consideration. According to Treasury officials, the
team analysis evolved over time as CPP staff became more experienced
and different examiners made their own modifications to the form. For
example, as the CPP team grew in size, additional fields were added to
document multiple levels of review by other examiners. As with the
case decision memos, the consistency of information in the team
analysis improved with time. For instance, team analysis documents did
not include calculations of allowable investment amounts for almost 60
files that we reviewed that Treasury had approved by the end of
December 2008. Finally, a small number of case files did not contain
an award letter, but all of those approvals had also occurred before
the end of December 2008.
Treasury and regulators compiled meeting minutes for the CPP Council
and Investment Committee, although they did not fully document some
early Investment Committee meetings. The minutes described discussions
of policy and guidance related to TARP and CPP and also the review and
approval decisions for individual applicants. However, records do not
exist for four meetings of the Investment Committee that occurred
between October 23, 2008, and November 12, 2008. According to
Treasury, no minutes exist for those meetings. We did not find any
missing meeting minutes for the CPP Council, although at the early
meetings, regulators did not collect the initials of voting members to
document their recommendations to approve or disapprove applicants
they reviewed. Within several weeks however, regulators began using
the CPP Council review decision sheets to document council members'
votes in addition to the meeting minutes.
Treasury's Implementation Process Limited Its Ability to Oversee
Regulators' Recommendations for Applicant Withdrawals:
Although the multiple layers of review for approved institutions
enhanced the consistency of the decision process, applicants that
withdrew from consideration in response to a request from their
regulator received no review by Treasury or other regulators. To avoid
a formal denial, regulators recommended that applicants withdraw when
they were unable to recommend approval or believed that Treasury was
unlikely to approve the institution. Some regulators said that they
also encouraged institutions not to formally submit applications if
approval appeared unlikely. Applicants could insist that the regulator
forward their application to the CPP Council and ultimately to the
Investment Committee for further consideration even if the regulator
had recommended withdrawal. However, Treasury officials said that they
did not approve any applicants that received a disapproval
recommendation from their regulator or the CPP Council. Regulators
also could recommend that applicants withdraw after the CPP Council or
Investment Committee decided not to recommend approval of their
application. One regulator stated that all the applicants it suggested
withdraw did so rather than receive a formal denial. Treasury
officials also said that institutions receiving a withdrawal
recommendation generally withdrew and that no formal denials were
issued.
Almost half of all applicants withdrew from CPP consideration before
regulators forwarded their applications to the CPP Council or
Treasury. Regulators had recommended withdrawal in about half of these
cases where information was available. Over the life of the program,
regulators received almost 3,000 CPP applications, about half of which
they sent to the CPP Council or directly to Treasury (see table 3).
The remaining applicants withdrew either voluntarily or after
receiving a recommendation to withdraw from their regulator. Three of
the regulators--OCC, OTS, and the Federal Reserve--indicated that
about half of their combined withdrawals were the result of their
recommendations. FDIC, which was the primary regulator for most of the
applicants, did not collect information on the reasons for applicants'
withdrawals.[Footnote 42] According to Treasury officials, those
applicants that chose to withdraw voluntarily did so for various
reasons, including uncertainty over future program requirements and
increased confidence in the financial condition of banks. In addition
to institutions that withdrew after applying for CPP, Treasury
officials and officials from a regulator indicated that some firms
decided not to formally apply after discussing their potential
application with their regulator. However, regulators did not collect
information on the number of firms deciding not to apply after having
these discussions.
Table 3: Withdrawals by CPP Applicants before Submission to CPP
Council or Treasury as of December 31, 2009:
Bank regulator: FDIC;
Total applications received: 1,814;
Voluntary withdrawal: Not available;
Recommended withdrawal: Not available;
Total applications sent to CPP Council or Treasury: 917.
Bank regulator: Federal Reserve;
Total applications received: 342;
Voluntary withdrawal: 42;
Recommended withdrawal: 82;
Total applications sent to CPP Council or Treasury: 218.
Bank regulator: OCC;
Total applications received: 442;
Voluntary withdrawal: 93;
Recommended withdrawal: 130;
Total applications sent to CPP Council or Treasury: 219.
Bank regulator: OTS;
Total applications received: 297;
Voluntary withdrawal: 131;
Recommended withdrawal: 40;
Total applications sent to CPP Council or Treasury: 126.
Bank regulator: Total;
Total applications received: 2895;
Voluntary withdrawal: Not available;
Recommended withdrawal: Not available;
Total applications sent to CPP Council or Treasury: 1,480.
Sources: FDIC, Federal Reserve, OCC, and OTS.
Note: Of the total 1,480 applications sent to the CPP Council or
Treasury, Treasury ultimately received 1,403 applications. These 1,403
applications resulted in 738 CPP transactions (for 707 institutions
because some institutions submitted multiple applications), 658
withdrawals, and 7 applications that were not approved.
[End of table]
Although applications recommended for approval received multiple
reviews and were coordinated among regulators and Treasury, each
regulator made its own decision on withdrawal recommendations. Most
regulators conducted initial reviews of applicants at their regional
offices, and staff at these offices had independent authority to
recommend withdrawal for certain cases. Regulatory officials said that
regional staff (including examiners and more senior officials) made
initial assessments of applicants' viability using Treasury guidelines
and would recommend withdrawal for weak firms with the lowest
examination ratings that were unlikely to be approved.[Footnote 43]
Applicants that received withdrawal recommendations might have had
weak characteristics relative to those of other firms and might have
received a denial from Treasury. But following regulators' suggestions
to withdraw before referral to the CPP Council or Treasury, or to not
apply, ensured that they would not receive the centralized reviews
that could have mitigated any inconsistencies in their initial
evaluations. Further, while regulators had panels or senior officials
at their headquarters offices providing central review of approved
applicants, most of the regulators allowed their regional offices to
recommend withdrawal for weaker applicants or encourage such
applicants not to apply, thereby limiting the benefit of that control
mechanism. Allowing regional offices to recommend withdrawal without
any centralized review may increase the risk of inconsistency within
as well as across regulators. In its report on the processing of CPP
applications, the FDIC Office of Inspector General found that one of
FDIC's regional offices suggested that three institutions withdraw
from consideration that were well capitalized and technically met
Treasury guidelines.[Footnote 44] Regional FDIC management cited poor
bank management as the primary concern in recommending that the
institutions withdraw. The report concluded that the use of discretion
by regional offices in recommending that applicants withdraw increased
the risk of inconsistency. The report made two recommendations to
enhance controls over the process for evaluating applications: (1)
forwarding applications recommended for approval that do not meet one
or more of Treasury's criteria to the CPP Council for additional
review and (2) requiring headquarters review of institutions
recommended for withdrawal when the institutions technically meet
Treasury's criteria. In commenting on the report, FDIC concurred with
the recommendations.
Treasury did not collect information on applicants that had received
withdrawal recommendations from their regulators or on the reasons for
these decisions. According to Treasury officials, Treasury did not
receive, request, or review information on applicants that regulators
recommended to withdraw and thus could not monitor the types of
institutions that regulators were restricting from the program or the
reasons for their decisions. The officials said that Treasury did not
collect or review information on withdrawal recommendations in part to
minimize the potential for external parties to influence the decision-
making process. However, such considerations did not prevent Treasury
from reviewing information on applicants that regulators recommended
for approval, and concerns about external influence could also be
addressed directly through additional control procedures rather than
by limiting the ability to collect information on withdrawal
recommendations. The lack of additional review outside of the
individual regulator or oversight of withdrawal requests by Treasury
presents the risk that applicants may not have been evaluated in a
consistent fashion across regulators. As the agency responsible for
implementing CPP, it is equally beneficial for Treasury to understand
the reasons that regulators recommended applicants withdraw from the
program as it is for Treasury to understand the reasons regulators
recommended approval. Collecting and reviewing information on
withdrawal requests would have served as an important control
mechanism and allowed Treasury to determine whether leaving certain
applicants out of CPP was consistent with program goals. It also would
have allowed Treasury to determine whether similar applicants were
evaluated consistently across different regulators in terms of their
decisions to recommend withdrawal.
Treasury has indicated that it may use the CPP model for new programs
to stimulate the economy and improve conditions in financial markets,
and unless corrective actions are taken, such programs may share the
same increased risk of similar participants not being treated
consistently. Specifically, in February 2010, Treasury announced terms
for a new TARP program--the Community Development Capital Initiative
(CDCI)--to invest lower-cost capital in Community Development
Financial Institutions that lend to small businesses. According to
Treasury and regulatory agency officials, Treasury modeled its
implementation of the CDCI program after the process it used for CPP,
with federal bank regulators--in this case including the National
Credit Union Administration (NCUA)--conducting the initial reviews and
making recommendations. The CDCI program also uses a council of
regulators to review marginal approvals, and an Investment Committee
at Treasury reviews all applicants recommended by regulators for
approval. As in the case of CPP, control mechanisms exist for
reviewing approved applicants, but no equivalent reviews are done for
applicants that receive withdrawal recommendations. Thus, the CDCI
structure could raise similar concerns about a lack of control
mechanisms to mitigate the risk of inconsistency in evaluations by
different regulators. The deadline for financial institutions to apply
to participate in the CDCI was April 30, 2010, and all disbursements
or exchanges of CPP securities for CDCI securities must be completed
by September 30, 2010.
The Small Business Jobs Act of 2010, enacted on September 27, 2010,
established a new Treasury program--the Small Business Lending Fund
(SBLF)--to invest up to $30 billion in small institutions to increase
small business lending.[Footnote 45] Treasury may choose to model the
new program's implementation on the CPP process, as it did with the
CDCI. Treasury is required to consult with the bank regulators to
determine whether an institution may receive a capital investment, and
Treasury officials have indicated that they would likely rely on
regulators to determine applicants' eligibility. Unless Treasury also
takes steps to coordinate and monitor withdrawal requests by
regulators, the disparity that existed in CPP between the control
mechanisms for approved applicants and those receiving withdrawal
recommendations may persist in this new program, potentially resulting
in similar applicants being treated differently.
Treasury Does Not Monitor Regulators' Decisions to Approve or Deny CPP
Repayments:
Treasury relies on decisions from federal bank regulators concerning
whether to allow CPP firms to repay their investments, but as with
withdrawal recommendations, it does not monitor or collect information
on regulators' decisions. The CPP institution submits a repayment
request to its primary federal regulator and Treasury (see figure 5).
Bank regulatory officials explained that their agencies use existing
supervisory procedures generally applicable to capital reductions as a
basis for reviewing CPP repurchase requests and that they approach the
decision from the perspective of achieving regulatory rather than CPP
goals. Following their review, regulators provide a brief e-mail
notification to Treasury indicating whether they object or do not
object to allowing an institution to repay its CPP investment.
Treasury, in turn, communicates the regulators' decisions to the CPP
firms.
Figure 5: Investment Repayment Process for CPP:
[Refer to PDF for image: illustration]
Financial institution (FI):
(A) Request repurchase of preferred stock or subordinated debt;
(B) Treasury notifies institution that request received and review is
under way.
Federal regulator:
(C) Regulator analyzes financial condition and viability of
institution since CPP funds were received. Approval or denial of
request is e-mailed to Treasury.
Treasury:
FI preferred stock or subordinated debt; FI warrants.
(D) Treasury notifies institution of the decision and instructs
institution to contact Treasury counsel to set up dates for closing
and settlement.
Does institution want to repurchase warrants?
(E) After repurchasing all preferred stock or subordinated debt, the
institution has 15 days to notify Treasury of its intentions to
repurchase warrants originally issued with the preferred stock.
No: Treasury may sell warrants;
Yes: (F) Treasury and the institution have 10 days to agree on a fair
market value (FMV) for the warrants. If they disagree, independent
appraisals are used to determine a FMV that will be used as the sales
price.
Sources: GAO (analysis); Art Explosion (images).
[End of figure]
As of August 2010, 109 institutions had formally requested that they
be allowed to repay their CPP investments, and regulators had approved
over 80 percent of the requests (see table 4). According to Treasury
officials, there have been no instances where Treasury has raised
concerns about a regulator's decision. Officials at the Federal
Reserve--which is responsible for reviewing most CPP repayment
requests because requests for bank holding companies go to the holding
company regulator--explained that they had not denied any requests but
had asked institutions to wait or to raise additional capital. In
these cases, institutions typically had experienced significant
deterioration since the CPP investment, raising concerns about the
adequacy of their capital levels.
Table 4: Repayment Requests as of August 2010:
Status of repayment request: Requests received;
Federal Reserve: 95;
FDIC: 2;
OCC: 1;
OTS: 11;
Total: 109.
Status of repayment request: Recommended for approval;
Federal Reserve: 78;
FDIC: 2;
OCC: 1;
OTS: 10;
Total: 91.
Status of repayment request: Not recommended for approval;
Federal Reserve: 17[A];
FDIC: 0;
OCC: 0;
OTS: 1[B];
Total: 18.
Sources: Federal Reserve, FDIC, OCC, OTS:
[A] Includes requests with a decision pending.
[B] Decision pending.
[End of table]
Under the original terms of CPP, Treasury prohibited institutions from
repaying their funds within 3 years unless the firm had completed a
qualified equity offering to replace a minimum amount of the capital.
[Footnote 46] However, the American Recovery and Reinvestment Act of
2009 (ARRA) included provisions modifying the terms of CPP repayments.
These provisions require that Treasury allow any institution to repay
its CPP investment subject only to consultation with the appropriate
federal bank regulator without considering whether the institution has
replaced such funds from any other source or applying any waiting
period.[Footnote 47] Treasury officials indicated that, as a result of
these restrictions, they did not provide guidance or criteria to
regulators. The officials explained that even before the ARRA
provisions limited Treasury's role, the standard CPP contract terms
allowed institutions to repay the funds at their discretion--subject
to regulatory approval--as long as they completed a qualified equity
offering or the 3-year time frame had passed. The officials said that
the contract terms themselves helped ensure that CPP goals were
achieved.
While the decision to allow repayment ultimately lies with the bank
regulators, Treasury is not statutorily prohibited from reviewing
their decision-making process and collecting information or providing
feedback about the regulators' decisions. The two regulators
responsible for most repayment requests prepare a case decision memo
to document their analysis that is similar to the memo they used to
document their evaluations of CPP applicants, but Treasury and agency
officials said that Treasury does not request or review the memo or
other analyses supporting regulators' decisions. One regulator
indicated that it would provide Treasury with a brief explanation of
the basis for its decisions to deny repayment requests and a brief
discussion of the supervisory concerns raised by the proposed
repayment. But Treasury officials stated that they did not review any
information on the basis for regulators' decisions to approve or deny
repayment requests. Without collecting or monitoring such information,
Treasury has no basis for considering whether decisions about similar
institutions are being made consistently and thus whether CPP firms
are being treated equitably. Furthermore, absent information on why
regulators made repayment decisions, Treasury cannot provide feedback
to regulators on the consistency of regulators' decision making for
similar institutions as part of its consultation role.
Regulators Independently Developed Similar Guidelines for Evaluating
Repurchase Requests and Processes for Coordinating Their Decisions
without Treasury Guidance:
Regulators have independently developed similar guidelines for
evaluating repurchase requests and also established processes for
coordinating decisions that involved multiple regulators, and Treasury
officials stated that they did not provide input to these guidelines
or processes. Regulators said that, in general, they considered the
same types of factors when evaluating repayment requests that they
considered when reviewing CPP applications. According to the
officials, regulators follow existing regulatory requirements for
capital reductions--including the repayment of CPP funds--that apply
to all of their supervised institutions. In addition to following
existing supervisory procedures, officials from the different banking
agencies indicated that they also considered a broad set of similar
factors, including the following:
* the institution's continued viability without CPP funds;
* the adequacy of the institution's capital and ability to maintain
appropriate capital levels over the subsequent 1 to 2 years, even
assuming worsening economic conditions;
* the level and composition of capital and liquidity;
* earnings and asset quality; and:
* any major changes in financial condition or viability that had
occurred since the institution received CPP funds.
Although regulators said that they considered similar factors in their
evaluations, without reviewing any information or analysis supporting
regulators' recommendations, Treasury cannot be sure that regulators
are using these guidelines consistently for all repayment requests.
In addition to setting out guidelines for standard repayment requests,
the Federal Reserve established a supplemental process to evaluate
repayment requests by the 19 largest bank holding companies that
participated in the Supervisory Capital Assessment Program (SCAP).
[Footnote 48] As we reported in our June 2009 review of Treasury's
implementation of TARP, the Federal Reserve required any SCAP
institution seeking to repay CPP capital to demonstrate that it could
access the long-term debt markets without reliance on debt guarantees
by FDIC and public equity markets in addition to other factors.
[Footnote 49] As of September 16, 2010, four bank holding companies
that participated in SCAP had not repurchased their CPP investment and
one had not repaid funds from TARP's Automotive Industry Financing
Program.[Footnote 50]
Bank regulators said that they also shared their repayment process
documents with each other to enhance the consistency of their
evaluations and recommendations. For example, the Federal Reserve
designed a repayment case decision memo that documents the review of
repayment requests and the factors considered in making the decision
and shared it with other regulators to promote consistency in their
reviews. Officials from OTS explained that they used the Federal
Reserve's repurchase case decision memo as the framework for their
document while adding certain elements specific to thrifts such as
confirmation that FDIC concurrence was received for thrift holding
companies with state bank subsidiaries regulated by FDIC. Bank
regulatory officials also stated that bank regulators discussed the
repayment process during their weekly conference calls on CPP-related
topics. OCC also prepares a memo to document its review of repurchase
requests that differs from the form used by the Federal Reserve and
OTS; however, it contains similar elements such as an explanation of
the analysis and the basis for the decision. Finally, FDIC officials
said that they followed existing procedures for capital retirement
applications from FDIC-supervised institutions that included safety
and soundness considerations.
Bank regulators also established processes for coordinating repayment
decisions for CPP firms with a holding company and subsidiary bank
supervised by different regulators. For example, Federal Reserve
officials said that if a holding company it supervised that had a
subsidiary bank under another regulator requested to repay CPP funds,
the agency would consult with the subsidiary's regulator before making
a final decision. The officials stated that if the regulator of the
subsidiary bank objected to the Federal Reserve's preliminary
decision, the regulators would try to reach a consensus. However, as
regulator of the holding company that received the CPP investment, the
Federal Reserve has the ultimate responsibility for making the
decision as it is considered the primary federal regulator in such
cases. According to Federal Reserve officials, when OTS is the primary
regulator of a subsidiary thrift, it provides a repayment case
decision memo to the Federal Reserve for it to consider as it
evaluates the repayment request. OCC also provides the Federal Reserve
with its analysis of any subsidiary bank for which it is the primary
regulator, and FDIC identifies certain individuals who provide their
recommendation and are available to discuss the decision. OTS performs
a similar coordination role for CPP repayment requests that involve
thrift holding companies with nonthrift financial subsidiaries.
However, if Treasury does not collect information on or monitor the
processes regulators use to make their repayment decisions, Treasury
cannot provide any feedback to regulators on the extent to which they
are coordinating their decisions.
Conclusions:
Approved CPP applicants generally had similar examination ratings and
other strength characteristics that exceeded guidelines. However, a
smaller group of firms had weaker characteristics and were approved
after consideration of mitigating factors by regulators and Treasury.
The ability to approve institutions after consideration of mitigating
factors illustrates the importance of including controls in the review
and selection process to provide reasonable assurance of the
achievement of program goals and consistent decision making.
While Treasury established such controls for applicants that
regulators recommended for approval, Treasury's process was
inconsistent in the control mechanisms that existed for applicants
that regulators recommended to withdraw from program consideration.
These institutions did not benefit from the multiple levels of review
that Treasury and regulators applied to approved applicants. For
example, regulators could decide independently which applicants they
would recommend to withdraw and may have considered mitigating factors
differently. Treasury did not collect information on these firms or
the reasons for regulators' decisions. Without mechanisms such as
those that exist for approved applicants to control for the risk of
inconsistent evaluations across different regulators, Treasury cannot
have reasonable assurance that all similar applicants were treated
consistently or that some potentially eligible firms did not end up
withdrawing after following the advice of their regulator. Treasury
officials explained their desire to conduct adequate due diligence on
all applicants recommended for approval, but as Treasury is the agency
responsible for implementing CPP, understanding the reasons that
regulators recommended applicants withdraw would have been equally
beneficial for Treasury. Collecting and reviewing information on
withdrawal requests would allow Treasury to determine whether
applicants that were left out of CPP were evaluated consistently
across different regulators and conformed to Treasury's goals for the
program.
Although Treasury is no longer making investments in financial
institutions through CPP, it may continue to use the process as a
model for similar programs as it has for the CDCI program. One such
program is the SBLF, which Congress authorized in September 2010. SBLF
contains elements similar to those of CPP and requires Treasury to
administer the program with bank regulators. Unless Treasury makes
changes to the CPP model to include monitoring and reviews of
withdrawal recommendations, these new programs may share the same
increased risk of similar participants not being treated consistently
that existed in CPP.
As with the approval process, agencies are expected to establish
control mechanisms to provide reasonable assurance that program goals
are being achieved. Treasury has not established mechanisms to
monitor, review, or coordinate regulators' decisions on repayment
requests because, in its view, it lacks the authority to do so and is
limited to carrying out regulators' decisions regarding the
institution making the request. However, Treasury is not precluded
from providing feedback to help ensure that regulators are treating
similar institutions consistently when considering their repayment
requests. Although regulators said that they consider similar factors
when evaluating CPP firms' repayment requests, without collecting
information on how and why regulators made their decisions, Treasury
cannot verify the degree to which regulators' decisions on requests to
exit CPP actually were based on such factors.
Recommendations for Executive Action:
If Treasury administers programs containing elements similar to those
of CPP, such as the SBLF, we recommend that Treasury apply lessons
learned from the implementation of CPP and enhance procedural controls
for addressing the risk of inconsistency in regulators' decisions on
withdrawals. Specifically, we recommend that the Secretary of the
Treasury direct the program office responsible for implementing SBLF
to establish a process for collecting information from bank regulators
on all applicants that withdraw from consideration in response to a
regulator's recommendation, including the reasons behind the
recommendation. We also recommend that the program office evaluate the
information to identify trends or patterns that may indicate whether
similar applicants were treated inconsistently across different
regulators and take action, if necessary, to help ensure a more
consistent treatment.
As part of its consultation with regulators on their decisions to
allow institutions to repay their CPP investments to Treasury, and to
improve monitoring of these decisions, we recommend that the Secretary
of the Treasury direct OFS to periodically collect and review certain
information from the bank regulators on the analysis and conclusions
supporting their decisions on CPP repayment requests and provide
feedback for the regulators' consideration on the extent to which
regulators are evaluating similar institutions consistently.
Agency Comments and Our Evaluation:
We provided a full draft of this report to Treasury for its review and
comment. We received written comments from the Assistant Secretary for
Financial Stability. These comments are summarized below and reprinted
in appendix III. In addition, we received technical comments on this
draft from the Federal Reserve, FDIC, OCC, and Treasury, which we
incorporated as appropriate. In its written comments, Treasury agreed
to consider our recommendation to review information on applicants
that regulators recommend to withdraw from program consideration if
Treasury implements a similar program in the future. Treasury stated
that the system used to evaluate CPP applicants balanced the
objectives of ensuring consistent treatment for all applicants while
also utilizing the independent judgment of federal banking regulators.
Treasury suggested that ensuring regulators hold regular discussions
about their standards could be an additional action to help ensure
consistency in regulators' reviews. As we note in the report, Treasury
implemented multiple layers of review for approved institutions to
enhance the consistency of the decision process. However, applicants
that withdrew from consideration in response to a request from their
regulator received no review by Treasury or other regulators. Although
CPP is no longer making any new investments, the passage of the SBLF,
which, according to Treasury officials, would also rely on regulators
to determine applicants' eligibility, presents an opportunity for
Treasury to address this area of concern. We continue to believe that
unless Treasury takes steps to monitor and provide feedback on
regulators' withdrawal requests, applicants that receive withdrawal
recommendations under this new program may not be treated consistently
and equitably.
Treasury stated that our second recommendation--to review information
on regulators' decisions on repayment requests and provide feedback to
regulators--also raises questions about how to balance the goals of
consistency and respect for the independence of regulators. However,
Treasury acknowledged the potential value of our recommendation and
agreed to consider ways to address it in a manner consistent with
these considerations. Specifically, Treasury noted that while it is
prohibited from imposing standards for repayment as a result of
statutory changes to its authority under EESA, it did help facilitate
meetings among regulators to discuss when CPP participants would be
allowed to repay their investments. Finally, Treasury explained that
it does not receive confidential supervisory information about CPP
participants on a regular basis, which could limit any information
collection envisioned by our recommendation. However, as we noted in
the report, the two regulators with responsibility for most CPP
repayment requests document their analysis in a manner similar to what
regulators provided to Treasury when recommending CPP applicants, but
Treasury does not review this information.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, interested congressional committees and members, Treasury,
the federal banking regulators, and others. The report also is
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at williamso@gao.gov or (202) 512-8678. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix IV.
Signed by:
Orice Williams Brown:
Director, Financial Markets and Community Investment:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Sander M. Levin:
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of our report were to (1) describe the characteristics
of financial institutions that received funding under the Capital
Purchase Program (CPP), and (2) assess how the Department of the
Treasury (Treasury), with the assistance of federal bank regulators,
implemented CPP.
To describe the characteristics of financial institutions that
received CPP funding, we reviewed and analyzed information from
Treasury case files on all of the 567 institutions that received CPP
investments through April 30, 2009.[Footnote 51] We gathered
information from the case files using a data collection survey that
recorded our responses in a database. Multiple analysts reviewed the
collected information, and we performed data quality control checks to
verify its accuracy. We used the database to analyze the
characteristics of CPP applicants including their supervisory
examination ratings, financial performance ratios, and regulators'
assessments of their viability, among other things. We spoke with
Treasury and regulatory officials about their processes for evaluating
applicants, in particular about actions they took to collect up-to-
date information on firms' financial condition. We also collected and
analyzed information from the records of the CPP Council and
Investment Committee meetings to understand how the committees
evaluated and recommended approval of CPP applicants. Additionally, we
collected limited updated information on all CPP institutions approved
through December 31, 2009--for example, their location, primary
federal regulator, ownership type, and CPP investment amount--from
Treasury's Office of Financial Stability (OFS) and from publicly
available reports on OFS's Web site to present characteristics for all
approved institutions. To describe how Treasury and regulators
assessed firms with weaker characteristics, we collected information
on the reasons regulators approved these firms and the concerns
regulators raised about their eligibility from case files and records
of committee meetings. To describe enforcement actions that regulators
took against these institutions, we reviewed publicly available
documents on formal enforcement actions from federal bank regulators'
Web sites. We also collected information on CPP firms that missed
their dividend or interest payments or restructured their CPP
investments from OFS and publicly available reports on its Web site.
Finally, we collected information from the Federal Deposit Insurance
Corporation (FDIC) on the number of CPP firms added to its list of
problem banks.
To assess how Treasury implemented CPP with the assistance of federal
bank regulators, we reviewed Treasury's policies, procedures, and
guidance related to CPP, including nonpublic documents and publicly
available material from the OFS Web site. We met with OFS officials to
discuss how they evaluated applications and repayment requests and
coordinated with regulators to decide on these applications and
requests. We interviewed officials from FDIC, the Office of the
Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS),
and the Board of Governors of the Federal Reserve System (Federal
Reserve) to obtain information on their processes for reviewing and
providing recommendations on CPP applications and repayment requests.
We also discussed the guidance and communication they received from
Treasury and their methods of formulating their CPP procedures.
Additionally, we collected and analyzed program documents from the
bank regulators, including policies and procedures, guidance
documents, and summaries of their evaluations of applications and
repayment requests. We also gathered data from regulators on
applicants that withdrew from CPP consideration--including the reason
for withdrawing--and on the number of repayment requests and their
outcomes. We reviewed relevant laws, such as the Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment
Act of 2009, to determine the impact of statutory changes to
Treasury's authority. To assess how Treasury and regulators documented
their decisions to approve CPP applicants, we analyzed information
from case files and CPP Council and Investment Committee meeting
minutes to identify how consistently Treasury and regulators included
relevant records of their reviews and decision-making processes. We
also discussed with Treasury and regulatory officials the key forms
they used to document their decisions and the evolution of these forms
over time. To assess Treasury programs that were modeled after CPP, we
collected and reviewed publicly available documents from Treasury and
interviewed Treasury officials to discuss the nature of these
programs--including the Community Development Capital Initiative
(CDCI) and Small Business Lending Fund (SBLF)--and plans for
implementing them. Finally, we met with the Federal Reserve's Office
of Inspector General to learn about its work examining the Federal
Reserve's CPP process and reviewed its report and other reports by
GAO, the Special Inspector General for the Troubled Asset Relief
Program (SIGTARP), and the FDIC Office of Inspector General.
This report is part of our coordinated work with SIGTARP and the
inspectors general of the federal banking agencies to oversee TARP and
CPP. The offices of the inspectors general of FDIC, Federal Reserve,
and Treasury and SIGTARP have all completed work or have work under
way reviewing CPP's implementation at their respective agencies. In
coordination with the other oversight agencies and offices and to
avoid duplication, we primarily focused our audit work (including our
review of agency case files) on the phases of the CPP process from the
point at which the regulators transmitted their recommendations to
Treasury.
We conducted this performance audit from May 2009 to September 2010 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Information on Processing Times for the Capital Purchase
Program:
In general, the time frame for the Department of the Treasury and
regulators to complete the evaluation and funding process for Capital
Purchase Program applicants increased based on three factors. First,
smaller institutions had longer processing time frames than larger
firms. The average number of days between a firm's application date
and the completion of the CPP investment increased steadily based on
the firm's size as measured by its risk-weighted assets. The smallest
25 percent of firms we reviewed had an average processing time of 100
days followed by 83 days for the next largest 25 percent of firms. The
two largest quartiles of firms had average processing times of 72 days
and 53 days respectively. Also, it took longer to complete the
investment for smaller firms, as the average time between preliminary
approval and disbursement increased as the institution size decreased.
Second, private institutions took longer for Treasury and regulators
to process than public firms. The average and median processing time
frames from application through disbursement of funds was about 6
weeks longer for private firms than for public firms. As with the
trend for smaller institutions, private institutions had longer
average time frames between preliminary approval and disbursement.
Third, when Treasury returned an application to regulators for
additional review, it took an average of about 2 weeks to receive a
response from regulators. On average, Treasury preliminarily approved
these applicants after an additional 3 days of review.
Firms that applied earlier had shorter average processing times--from
application to disbursement--than firms that applied in later months.
The average time from application through disbursement was 70 days for
firms that applied in October, 82 days for firms that applied in
November, and 89 for those that applied in December. Also, public
firms tended to apply earlier than private firms and larger firms
tended to apply earlier than smaller firms. For example, 62 percent of
firms that applied in October were public, while 93 percent of firms
that applied in December were private--a trend that largely resulted
from the later release of program term sheets for the privately held
banks. Likewise, 61 percent of firms that applied in October were the
largest firms and 84 percent of firms that applied in December were
the smallest firms. Because larger firms and public firms also had
shorter average processing time frames than smaller and private firms,
this may explain why firms that applied earlier had shorter processing
times than those that applied later in the program.
The overall process for most firms, from when they applied to when
they received their CPP funds, took 2 1/2 months. There were many
interim steps within this broad process that can shorten or lengthen
the overall time frame. For example, in our June 2009 report on the
status of Treasury's implementation of the Troubled Asset Relief
Program, we reported that the average processing days from application
to submission to Treasury varied among the different regulators from
28 days to 57 days.[Footnote 52] Also, Treasury preliminarily approved
most firms within 5 weeks from application. The Investment Committee
approved most firms the same day it reviewed them; however, it
generally took longer to approve firms with the lowest examination
ratings, resulting in a longer average review time frame. As
previously mentioned, firms that Treasury returned to regulators for
additional review took longer to receive Treasury's preliminary
approval, and these firms tended to be those with lower examination
ratings. Once Treasury preliminarily approved an applicant, it took an
average of 33 days to complete the investment. As with the trends for
the overall processing time frames, the final investment closing and
disbursement took longer for smaller institutions and private
institutions.
[End of section]
Appendix III: Comments from the Department of the Treasury's Office of
Financial Stability:
Department Of The Treasury:
Assistant Secretary:
Washington, DC 20220:
September 17, 2010:
Thomas J. McCool:
Director, Center for Economics Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Department of the Treasury (Treasury) appreciates the opportunity
to review the GAO latest draft report on Treasury's Troubled Asset
Relief Program (TARP), titled "Opportunities to Apply Lessons Learned
from the Capital Purchase Program to Similarly Designed Programs and
to Improve the Repayment Process" (Draft Report). Much in the Draft
Report, the product or a 15-Month review by a talented and
professional GAO staff, is likely to be beneficial if any future
programs are modeled after the Capital Purchase Program (CPP).
The GAO's recommendations are that Treasury should monitor and
evaluate the actions of the federal banking regulators with respect to
CPP funding and repayment. First, the GAO recommends that Treasury
monitor decisions made by federal banking regulators not to recommend
an institution for funding in order to ensure that similar applicants
are treated equitably. The goal of insuring consistent treatment is
one with which no one would disagree. We also believe that the
independent judgment of the federal banking regulators was of great
value to the CPP process and would be of great value in any similar
program in the future. The system that was used to evaluate and
approve CPP applications balanced these objectives. In Particular, we
believe that having certain applications reviewed by a council of all
four regulators, the meetings of which Treasury attended as a
nonvoting member, served to help ensure consistency. The use of
standardized applications and further review by a Treasury investment
committee also helped achieve consistency. As you know, we have
followed a similar approval process for the Community Development
Capital Initiative. Nevertheless, we are happy to consider the GAO's
suggestion should there be a similar program in the future. Ensuring
that there are regular discussions among the regulators regarding
their standards, which could be done at "council" meetings or
otherwise, could be another way to address the GAO's concern.
The second recommendation is that Treasury should monitor and evaluate
the regulators' decisions on CPP repayments. This recommendation also
raises the issues of how to balance the goals of consistency and
respecting the independence of the regulators. As you know, the
Emergency Economic Stabilization Act of 2008 was amended to override
contractual provisions in the CPP contracts which required Treasury's
consent before an institution could repay unless certain standards
were met. Instead, the law provides that Treasury shall permit a TARP
recipient to repay "subject to consultation with the appropriate
Federal banking agency." The law explicitly provides that this right
to repay is "without regard to whether the financial institution has
replaced such funds from any other source or to any waiting period".
hi light of this change in the law, Treasury cannot dictate standards
for repayment. However, Treasury helped facilitate meetings among the
regulators in the spring of 2009 at which they discussed what would be
the standards for permitting TARP recipients to repay.
The recommendation that Treasury "collect information" on regulators
decisions and "provide feedback on the extent to which regulators are
evaluating similar institutions consistently" must be considered in
this context. Among the benefits of having the appropriate regulator
perform such assessments are that the relevant examiners are the most
familiar with the institutions and are free to make the decisions in
an independent manner. Moreover, Treasury does not receive
confidential supervisory information about CPP recipients on a regular
basis, which would limit any information collection contemplated by
the GAO.
Nevertheless, we recognize the value of the objective you propose, and
we will consider ways to address that objective in a manner consistent
with the law, the principles of regulatory independence, and the need
to treat supervisory information confidentially.
We look forward to continuing to work with you and your team as we
continue our efforts to stabilize our financial system.
Sincerely,
Signed by:
Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice Williams Brown (202) 512-8678 or williamso@gao.gov:
Staff Acknowledgments:
Daniel Garcia-Diaz (Assistant Director), Kevin Averyt, William Bates,
Richard Bulman, Emily Chalmers, William Chatlos, Rachel DeMarcus,
M'Baye Diagne, Joe Hunter, Elizabeth Jimenez, Rob Lee, Matthew
McDonald, Marc Molino, Bob Pollard, Steve Ruszczyk, and Maria Soriano
made important contributions to this report.
[End of section]
Footnotes:
[1] Other government efforts to stabilize the financial system
included Treasury's Targeted Investment Program, the Federal Deposit
Insurance Corporation's Temporary Liquidity Guarantee Program and the
Board of Governors of the Federal Reserve System's Term Asset-Backed
Securities Loan Facility and emergency lending programs such as the
Commercial Paper Funding Facility, the Primary Dealer Credit Facility,
and the Term Securities Lending Facility.
[2] As authorized by the Emergency Economic Stabilization Act of 2008
(EESA), Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12
U.S.C. §§ 5201 et seq. EESA was signed into law on October 3, 2008 to
help stem the worst financial crisis since the 1930s. EESA established
the Office of Financial Stability within Treasury and provided it with
broad, flexible authorities to buy or guarantee troubled mortgage-
related assets or any other financial instruments necessary to
stabilize the financial markets.
[3] Section 3(9) of the act, 12 U.S.C. § 5202(9). The act requires
that the appropriate committees of Congress be notified in writing
that the Secretary of the Treasury, after consultation with the
Federal Reserve Chairman, has determined that it is necessary to
purchase other financial instruments to promote financial market
stability.
[4] A warrant is an option to buy shares of common stock or preferred
stock at a predetermined price on or before a specified date.
[5] Section 116 of EESA, 122 Stat. at 3783 (codified at U.S.C. § 5226).
[6] See GAO, Troubled Asset Relief Program: Additional Actions Needed
to Better Ensure Integrity, Accountability, and Transparency,
[hyperlink, http://www.gao.gov/products/GAO-09-161] (Washington, D.C.:
Dec. 2, 2008); Troubled Asset Relief Program: Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009); Troubled Asset Relief Program: March 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009); Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: Jun. 17,
2009); and Troubled Asset Relief Program: One Year Later, Actions Are
Needed to Address Remaining Transparency and Accountability
Challenges, [hyperlink, http://www.gao.gov/products/GAO-10-16]
(Washington, D.C.: Oct. 8, 2009).
[7] Risk-weighted assets are the total assets and off-balance-sheet
items held by an institution that are weighted for risk according to
the federal banking agencies' regulatory capital standards.
[8] For purposes of CPP, qualifying financial institutions generally
include stand-alone U.S.-controlled banks and savings associations, as
well as bank holding companies and most savings and loan holding
companies.
[9] In May 2009, Treasury increased the maximum amount of CPP funding
that small financial institutions (qualifying financial institutions
with total assets less than $500 million) may receive from 3 percent
of risk-weighted assets to 5 percent of risk-weighted assets.
[10] For certain types of institutions known as S corporations,
Treasury received subordinated debt rather than preferred shares to
preserve these institutions' special tax status.
[11] Bank holding companies are entities that own or control one or
more U.S. commercial banks. Financial holding companies are a subset
of bank holding companies that may engage in a wider range of
activities.
[12] The Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203, Title III, 124 Stat. 1376, 1520 (2010), includes
provisions to abolish OTS and allocate its functions among the Federal
Reserve, OCC, and FDIC.
[13] The primary federal regulator is generally the regulator
overseeing the lead bank of the institution. Where the institution is
owned by a bank holding company, the primary federal regulator also
consults with the Federal Reserve.
[14] The nine major financial institutions were Bank of America
Corporation; Citigroup, Inc.; JPMorgan Chase & Co.; Wells Fargo &
Company; Morgan Stanley; The Goldman Sachs Group, Inc.; The Bank of
New York Mellon Corporation; State Street Corporation; and Merrill
Lynch & Co., Inc.
[15] Under CPP program guidelines, a public institution is a company
(1) whose securities are traded on a national securities exchange and
(2) that is required to file, under the federal securities laws,
periodic reports such as the annual and quarterly reports with either
the Securities and Exchange Commission or a primary federal bank
regulator. A privately held institution is a company that does not
meet the definition of a public institution. Institutions traded in
over-the-counter markets had the option to participate under the terms
for private institutions.
[16] The top 5 states receiving the most CPP investments were New York
($80,194,291,000), North Carolina ($28,695,010,000), California
($27,667,578,000), Pennsylvania ($9,848,886,000), and Ohio
($7,840,580,000). The states receiving the least amount of CPP
investments were Alaska ($4,781,000), the District of Columbia
($6,000,000), Arizona ($8,047,000), Wyoming ($8,100,000), and Rhode
Island ($31,065,000).
[17] The dates of the risk-weighted assets were from 2008, although
dates were not available for 161 of the 567 firms we reviewed.
[18] FDIC was the primary regulator for most of the institutions that
participated in CPP--424 firms, or 60 percent of those we reviewed.
The Federal Reserve was the primary regulator for 112 firms, or 16
percent; OCC was the primary regulator for 116, or 16 percent; and OTS
for 55, or 8 percent.
[19] The federal banking agencies assign a supervisory rating when
they conduct examinations of a bank or thrift's safety and soundness.
The numerical ratings range from 1 to 5, with 1 being the strongest
and 5 the weakest. The ratings--referred to as CAMELS--assess six
components of an institution's financial health: capital, asset
quality, management, earnings, liquidity, and sensitivity to market
risk. Treasury instructed regulators to consider CAMELS ratings, among
other indicators, in making approval recommendations. Treasury and
regulators also identified six performance ratios for evaluating
applicants. Three of the ratios related to regulatory capital levels--
Tier 1 risk-based capital ratio, total risk-based capital ratio, and
Tier 1 leverage ratio. The other three ratios measured certain classes
of assets--including classified assets, nonperforming loans, and
construction and development loans--as a share of capital and reserves.
[20] SunTrust Banks, Inc., and Bank of America Corporation each
received two CPP investments in separate transactions. Therefore, the
number of unique institutions receiving CPP investments through April
30, 2009 is 565.
[21] The Federal Reserve assigns each bank holding company a composite
rating (C) based on an evaluation of its managerial and financial
condition and an assessment of future potential risk to its subsidiary
bank or thrift. The main components of the rating system represent
risk management (R), financial condition (F), and potential impact (I)
of the holding company and nonbank or nonthrift subsidiaries on the
bank or thrift. Examiners assign ratings based on a 1-to-5 numeric
scale. A 1 indicates the highest rating, strongest performance and
practices, and least degree of supervisory concern; a 5 indicates the
lowest rating, weakest performance, and highest degree of supervisory
concern.
[22] Federal banking regulators also examine the institutions they
supervise to determine their compliance with CRA. Congress enacted CRA
in 1977 to encourage depository institutions to help meet the credit
needs of the communities in which they operate, including low-and
moderate-income neighborhoods. A CPP applicant's CRA rating is another
factor that Treasury instructed the federal banking regulators to
consider in making approval recommendations.
[23] The minimum amount of regulatory capital is the amount required
by bank regulators for an institution to be considered adequately
capitalized for purposes of prompt corrective action. Prompt
corrective action is a supervisory framework for banks that links
supervisory actions closely to a bank's capital ratios. Under prompt
corrective action, institutions below this threshold are considered
undercapitalized.
[24] The Tier 1 risk-based capital ratio is defined as Tier 1 capital
as a share of risk-weighted assets (RWA). Tier 1 capital consists of
core elements such as common stock, noncumulative perpetual preferred
stock, and minority interests in consolidated subsidiaries. Risk-
weighted assets are on-and off-balance sheet assets adjusted for their
risk characteristics.
[25] Some of the CPP institutions we reviewed were newly chartered
banks, referred to as de novo institutions. In their early years of
operation, de novo banks may have high amounts of capital relative to
their assets and low levels of nonperforming loans as they extend
credit to new clients and grow their loan portfolios. One such bank
that opened the same year it applied for CPP accounted for the highest
regulatory capital ratios in each of the three categories (Tier 1 risk-
based capital ratio, Tier 1 leverage ratio, and total risk-based
capital ratio).
[26] The Tier 1 leverage ratio is defined as Tier 1 capital as a share
of average total consolidated assets.
[27] The total risk-based capital ratio is defined as total capital as
a share of risk-weighted assets. Total capital includes Tier 1 capital
and Tier 2 capital, or supplementary capital.
[28] At the initiation of CPP, Treasury and regulators defined
acceptable levels for the three performance ratios relating to asset
quality (classified assets ratio, nonperforming loan and real estate-
owned ratio, and construction and development loan ratio). The
criteria for the three performance ratios relating to capital levels
(Tier 1 risk-based capital ratio, total risk-based capital ratio, and
the Tier 1 leverage ratio) are based on regulatory minimums for an
institution to be considered adequately capitalized. For the leverage
ratio, we used the minimum level that applies to most banks and bank
holding companies (4 percent), although regulators applied a lower
level to banks and bank holding companies with strong examination
ratings. Banks with overall unsatisfactory examination ratings are
those with a composite CAMELS rating weaker than 2. We reviewed
enforcement actions available through regulators' Web sites to
determine whether actions were formal or informal, active at the time
of CPP approval, or related to compliance or safety and soundness.
[29] Treasury and regulatory officials said that they did not have
absolute criteria for evaluating CPP applicants and did not make
approval decisions solely on the basis of specific quantitative
measurements. Treasury and regulatory officials explained that they
also relied on their judgment and familiarity with the firms they
supervised.
[30] For example, holders of subordinated debt have a claim on the
firm's assets, and institutions issuing subordinated debt have an
obligation to repay those funds, even though holders of the
subordinated debt may have a lower priority for repayment than
depositors or senior debt holders in the event of an insolvency or
bank seizure. Institutions do not have an obligation to repay funds
received from purchasers of their common stock or certain types of
preferred stock.
[31] Under the CPP terms, institutions pay cumulative dividends on
their preferred shares except for banks that are not subsidiaries of
holding companies, which pay noncumulative dividends. Some other types
of institutions, such as S corporations, received their CPP investment
in the form of subordinated debt and pay Treasury interest rather than
dividends.
[32] The following number of institutions missed their scheduled
dividend or interest payments by due date: February 2009-8, May 2009-
18, August 2009-34, November 2009-54, February 2010-79, May 2010-97,
and August 2010--123.
[33] CPP dividend and interest payments are due on February 15, May
15, August 15 and November 15 of each year, or the first business day
subsequent to those dates. The first CPP dividend and interest
payments were due in February 2009, for a total of seven possible
payments due through August 2010. The reporting period ends on the
last day of the calendar month in which the dividend or interest
payment is due. Some institutions made their dividend or interest
payments after the end of the reporting period.
[34] One firm identified as a marginal approval has had two formal
enforcement actions since receiving its CPP investment--one each from
FDIC and the Federal Reserve.
[35] Four CPP institutions have filed for bankruptcy protection or had
regulators place their banking subsidiary in receivership--UCBH
Holdings Inc., CIT Group Inc., Pacific Coast National Bancorp, and
Midwest Banc Holdings. However, none of these firms failed to meet the
CPP program guidelines or other criteria used to identify institutions
with weak characteristics.
[36] The information on restructured CPP investments does not include
Citigroup, which exchanged its CPP shares for financial instruments
that converted to common shares in September 2009. Treasury said that
it does not include Citigroup because it received investments under
several TARP programs in addition to CPP such as the Targeted
Investment Program and it is monitored separately within Treasury.
[37] See GAO, Standards for Internal Control in the Federal
Government, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.:
Nov. 1, 1999).
[38] In addition to the limited formal guidance, Treasury subsequently
provided regulators with informal and case-specific guidance using e-
mails and conference calls. For example, Treasury held regular weekly
conference calls with the bank regulators to discuss concerns about
specific applicants and also broader process and policy issues such as
commercial real estate exposures.
[39] The guidance identified other factors for consideration, such as
the existence of a signed merger agreement involving the institution
or a confirmed private equity investment. Finally, the guidance
document defined three categories for regulators to use in classifying
applicants that were based on examination ratings (such as the CAMELS
ratings), the age of the ratings, and financial performance ratios
(including capital and asset quality ratios).
[40] Board of Governors of the Federal Reserve System Office of
Inspector General, Audit of the Board's Processing of Applications for
the Capital Purchase Program under the Troubled Asset Relief Program,
(Washington, D.C.: Sept. 30, 2009).
[41] For example, one memo stated only "Confirmed Category 1
institution. Recommend Approval." Others stated "Category 1
institution; approved under 12 USC 1823(c)(4) systemic risk exception."
[42] As part of its review of FDIC's processing of CPP applicants,
FDIC's Office of Inspector General evaluated the reasons for
application withdrawals that occurred as of December 10, 2008, and
found that 42 percent had been suggested to withdraw by FDIC regional
offices. The remainder withdrew voluntarily. See FDIC Office of
Inspector General, Controls Over the FDIC's Processing of Capital
Purchase Program Applications from FDIC-Supervised Institutions, EVAL-
09-004 (Arlington, VA.: Mar. 20, 2009).
[43] We did not examine regulators' files on withdrawn applicants to
identify actual instances of inconsistencies to avoid duplication of
work conducted by SIGTARP and agency inspectors general that reviewed
CPP implementation at their respective agencies.
[44] FDIC Office of Inspector General, Controls Over the FDIC's
Processing of Capital Purchase Program Applications from FDIC-
Supervised Institutions.
[45] Pub. L. No. 111-240, Title IV, Subtitle A, 124 Stat. 2504 (2010).
[46] A qualified equity offering is the sale and issuance of Tier 1
qualifying perpetual preferred stock, common stock, or a combination
of such stock for cash. Under the original terms, CPP investments in
the form of senior preferred shares could only be redeemed prior to 3
years from the date of investment with the proceeds of qualified
equity offerings that resulted in aggregate gross proceeds to the
financial institution of not less than 25 percent of the issue price
of the senior preferred.
[47] Pub. L. No. 111-5, div. B, § 7001, 123 Stat. 115, 516 (2009).
Section 7001 provides, in part, that "Subject to consultation with the
appropriate Federal banking agency, if any—Treasury shall permit a
TARP recipient to repay any assistance previously provided under the
TARP to such financial institution, without regard to whether the
financial institution has replaced the funds from any other source or
to any waiting period."
[48] SCAP was an effort initiated in February 2009 by the Federal
Reserve and other federal banking regulators to conduct a
comprehensive simultaneous assessment of the capital held by the 19
largest bank holding companies. It was designed as a forward-looking
exercise intended to help regulators gauge the extent of additional
capital necessary to keep the institutions strongly capitalized and
able to lend even if economic conditions were worse than had been
expected.
[49] For more information, see [hyperlink,
http://www.gao.gov/products/GAO-09-658].
[50] The four CPP firms that participated in SCAP and had not repaid
the capital as of September 16, 2010 were Fifth Third Bancorp,
KeyCorp, Regions Financial Corporation, and SunTrust Banks, Inc. The
fifth firm was GMAC, which received TARP funds through the Automotive
Industry Financing Program, which Treasury established in December
2008 to help stabilize the U.S. automotive industry and avoid
disruptions that would pose systemic risk to the nation's economy.
Citigroup, Inc., exchanged its CPP shares for financial instruments
that converted to common shares in September 2009, and Treasury has
begun the process of selling its shares of Citigroup, Inc., common
stock.
[51] In total, Treasury invested in 707 financial institutions through
December 31, 2009, when it closed CPP to new investments.
[52] See [hyperlink, http://www.gao.gov/products/GAO-09-658].
[End of section]
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