S&P Positive on Financial Stability Plan
Standard & Poor’s offers a tentative thumbs-up to the financial stability plan announced by US Treasury Secretary Timothy Geithner on Tuesday:
If it is fully implemented as preliminarily envisaged, Standard & Poor’s Ratings Services currently believes the Obama Administration’s Financial Stability Plan should be beneficial to the credit quality of banks.
“All financial institutions with more than $100 billion in assets will be required to participate in a coordinated supervisory review process involving the Federal Reserve, FDIC, Office of the Comptroller of the Currency, and Office of Thrift Supervision. This will entail, in part, a “comprehensive stress test that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.” Financial institutions that have undergone this test will have access to a “capital buffer” provided by the U.S. Treasury (i.e., contingent capital that will be provided in the form of a convertible preferred security investment from Treasury that the companies can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. Many large U.S. financial institutions currently have depleted common equity bases, with hybrid capital issues in different forms comprising a disproportionate amount of their total Tier 1 capital.)”
Key issues S&P will monitor include:
- The nature of the stress testing, including the assumptions to be made, and how stress tolerance thresholds are to be defined and reassessed over time;
- Whether smaller banks will also participate in the stress-testing process in some circumstances;
- The consequences for companies not meeting the thresholds;
- The specific terms of the contingent capital to be provided, including the related dividend/interest rate; and
- The conditions under which companies’ ability to meet dividend/interest obligations under existing hybrid capital issues could be constrained.
For details see: Latest U.S. Government Financial Stability Plan Has Potential To Help Banks’ Credit Quality.”
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