WASHINGTON — The Treasury Department on Monday unveiled a standardized application for bankers seeking capital injections while also clearing some potential obstacles to participation in the $250 billion program.
But despite urging from federal regulators, bankers and industry representatives are balking, citing executive compensation limits and other strings attached to the recapitalizations.
"The application is easy, but the decision is much more difficult," said Kip Weissman, a partner at Luse Gorman. "There's going to be a complex stew of factors that institutions will have to evaluate, including … regulatory pressure."
Treasury Secretary Henry Paulson held a morning press conference to announce there is enough money for all qualifying banks. The government has already agreed to provide $125 billion in equity to the nine largest financial institutions; the rest of the industry has until Nov. 14 to apply for the other $125 billion.
"Sufficient capital has been allocated so that all qualifying banks can participate," Mr. Paulson said. "Let me be clear that this program is not being implemented on a first-come, first-served basis."
Federal regulators said eligible institutions will be able to sell equity interests to the Treasury in amounts equal to 1% to 3% of an institution's risk-weighted assets, to a maximum of $25 billion.
Interested banks and thrifts may submit an application to their primary federal regulator. Once the regulator reviews an application, it will send it along with its recommendation to the Office of Financial Stability at the Treasury Department. Mr. Paulson said the department would give great weight to the recommendations of the banking agencies.
All approved transactions will be announced to the public within 48 hours of execution. Mr. Paulson said the Treasury will not announce any applications that are withdrawn or denied.
"This efficient process — with standardized forms and standardized review — will encourage banks and thrifts of all sizes to participate in the program," he said. "By doing so, they will increase their capital base so that they can provide the lending necessary to support the U.S. economy as we work through this difficult period."
But Mr. Paulson and the regulators did not specify exact criteria they will use to judge an institution, saying only that the program is designed to attract "healthy institutions." Government officials said that Camels ratings and whether a bank is involved in a merger or raising capital from the private sector will be factors in the decision-making process.
The Treasury did confine the program to bank holding companies, financial holding companies, and insured depository institutions. This excludes other companies, such as automobile manufacturers, that some had speculated might receive funds.
In the application, bankers must list the requested amount of capital; the amount of an institution's authorized but unissued preferred and common stock; total risk-weighted assets; and any Treasury requirement it does not think it can comply with.
Regulators also took steps to clear up any accounting problems that could have hampered participation. The Securities and Exchange Commission and the Financial Accounting Standards Board drafted a letter to the Treasury that said warrants issued to the government by banks taking part in the capitalization plan would be recorded as equity.
That decision should resolve questions about whether warrants would be treated as liabilities under generally accepted accounting principles. That could have lowered earnings at banks and ultimately hurt their capital levels — the exact opposite of what the Treasury program is designed to do.
Banking regulators also clarified that banks can count Treasury equity stakes as Tier 1 capital — resolving yet another concern about the program among bankers.
Industry representatives largely supported the Treasury's moves.
"It looks like they are clearing the remaining hurdles," said Scott Talbott, the senior vice president of government affairs at the Financial Services Roundtable.
Still, it is not a given that most banks will participate. To receive a capital injection, banks must agree to the Treasury's terms and conditions, including giving the department warrants. For the first three years that the Treasury owns those warrants, a bank could not increase dividends on common stock without the Treasury's approval. Banks also would not be able to repurchase or redeem any junior preferred stock or common stock without permission from the Treasury.
That could be a deterrent for some financial institutions, observers said. "If you are going to issue preferred stock and warrants, from a capital management standpoint you have to plan to increase your earnings to No. 1, cover the dividends, and No. 2, cover the dilution from the warrants," Mr. Weissman said. "That could become a big issue."
Gil Schwartz, a partner at Schwartz & Ballen LLP, said institutions also could be dissuaded by a provision that limits executive compensation at banks receiving capital injections.
The Treasury announcement "answers a lot of questions about how you go about doing it," he said. "The real question is still is it going to be attractive enough to get enough banks to apply for the stock? There's a lot of limits on it."
Also left unresolved Monday was how privately held companies could participate. Government officials said they are still working on the issue. "What is not clear is how will or in what form will Subchapter S banks be allowed to participate," said Camden Fine, the president of the Independent Community Bankers of America.
More than 2,500 banks are Subchapter S banks, Mr. Fine said.
"I know there are several of those banks that wish to be involved," he said.
Industry representatives also said the Nov. 14 deadline may prove problematic for certain bankers. "How firm that deadline is or how flexible?" asked Wayne Abernathy, executive director of financial institutions policy and regulatory affairs for the American Bankers Association. "That's particularly important with small community banks that might not have the authority to release particular shares."
Banks that cannot comply with the program's conditions by Nov. 14 must provide an explanation along with their application. Failure to agree to all the terms and conditions may result in disqualification.
Industry representative said the deadline is an example of pressure regulators are putting on banks to participate. In a joint statement on Monday, the banking and thrift regulators encouraged all eligible institutions to use the program.
"In the long run if the regulators force the banks to make decisions that are bad for their stockholders it will impair their ability to raise private capital which is the Treasury's stated goal in this whole program," Mr. Weissman said.
Questions also still remain about what role the Treasury will have once it has invested in institutions. It has said it wants the program to encourage private companies to begin lending again, but how and whether this will do that job remains to be seen.
"It is not clear applying to get capital will be a stigma," said Joseph Mason, an associate professor of finance at Louisiana State University and a former Office of Comptroller of the Currency economist.
"Is Treasury going to make the banks reveal anything, or lend? That creates a big risk in bankers' minds; if I take this money that looks like free money, it is still not clear on the control Treasury can attach on a free whim."