By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, June 3, 2009
Several large banks may get government approval to repay billions of dollars in federal aid next week after completing a series of tests to prove they can stand without crutches.
J.P. Morgan Chase, Goldman Sachs and American Express are among the most likely candidates to get the Treasury Department's blessing, according to financial analysts. Together they owe the government $38.4 billion. Other banks bidding for approval include Capital One of McLean, BB&T of North Carolina and U.S. Bancorp of Minnesota.
The Federal Reserve, which is administering the process for the Treasury, announced Monday that a first batch of applications would be approved next week.
The strongest banks have pressed the administration for permission to repay the aid they received in the fall during the depths of the financial crisis. The government's embrace kept them from collapse, but the firms now are eager to show renewed vigor and escape restrictions, including limits on employee compensation.
J.P. Morgan Chase issued a statement Monday that said federal approval "is in the best interests of the country and the company."
But the government has imposed stricter standards on large banks than on small banks, about 20 of which already have been allowed to repay aid.
The test has four parts. Banks must convince regulators that repaying the government will not reduce lending. They also must show that repayment will not reduce capital reserves -- money set aside to absorb unexpected losses -- below the levels required by regulators. To demonstrate that money can be raised from investors, banks must sell new shares of common stock and, finally, they must issue debt without the safety net of a government guarantee.
The Fed's announcement of the rules on Monday set off a scramble among banks that had not expected they'd be required to sell new common shares.
J.P. Morgan Chase said it would meet all four conditions once it completes a plan to sell $5 billion in shares. American Express said it would sell $500 million in shares. Other companies seeking approval, including Goldman Sachs, Capital One, BB&T and U.S. Bancorp, sold shares earlier this year.
Regulators have not detailed publicly how many shares a firm must sell to demonstrate its independence from federal aid. Regulators said they will set requirements for each institution.
The latest requirement that banks sell new common shares makes it harder for weaker banks to repay the government. Many firms, including Bank of America and Citigroup, had already been ordered by regulators to add billions of dollars in common equity after the completion of government stress tests last month. This was intended to better protect shareholders against unexpected losses. Now, banks are being told that they must sell even more common shares. Paul Miller, an analyst at FBR Capital Markets, said the added condition would delay repayment plans at some banks.
Only one company required to raise money after the stress tests, Morgan Stanley, seems to be trying to meet the new conditions for repaying aid. The bank, which raised the $1.8 billion required by the stress test, yesterday announced it would sell another $2.2 billion in common shares.