WASHINGTON — Amid criticism that banks are hoarding the money they have received from the government, the Federal Deposit Insurance Corp. on Monday became the first bank regulator to require its supervised institutions to monitor and report how they have spent those funds.
The agency effectively preempted lawmakers, many of whom have pushed such a requirement in pending legislation.
But it was unclear whether other regulators would follow suit, or whether FDIC-supervised banks are being singled out.
"You would like the government to be sounding similar calls rather than just having one agency get out in front by itself on this," said V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker LLP. "They need to address coming up with a common approach."
In a letter Monday to financial institutions, the FDIC said the state-chartered banks under its jurisdiction must install a monitoring process that documents how they have spent funds received from the $700 billion Troubled Asset Relief Program and other government programs. The agency said its examiners would look closely at such information to ensure that the banks had used their government money for prudent lending and foreclosure prevention. The agency also encouraged banks to include the data in public earnings reports.
Specifically the FDIC wants to track how institutions have used money from Tarp's $250 billion Capital Purchase Program, the Federal Reserve Board's multiple liquidity programs, and an FDIC guarantee of unsecured debt and zero-interest deposits.
The agency echoed concerns that the money not be used solely to strengthen banks' cash reserves or to support operations not tied to consumer credit.
"The FDIC expects that state nonmember institutions (or their parent companies) will deploy funding received from these federal programs to prudently support credit needs in their market and strengthen bank capital," the agency said.
The agency also issued a release instructing all institutions how to report monthly their balance of debt covered by the liquidity guarantee.
Though the FDIC acted on its own, a source familiar with talks among the agencies said a coordinated move is on the table.
"The regulators are discussing the best way of going about … monitoring the use of funding," said the source, who spoke on the condition of anonymity.
Steve Fritts, the FDIC's associate director of risk management policy, said the letter was meant to "reinforce our message" from a November interagency statement that institutions should use their funds prudently.
"Banks never had public money investment before," he said. "This is a big, new deal. It's important to communicate with them, and make sure they understand that … the expectation is that they use this to support their primary business activities."
He said observers should not read too much in to the FDIC's issuing the release alone, and it was meant to be "generalized" in case regulators or the Treasury Department - which runs Tarp - come out with more specific reporting standards in the future.
"There will be some more precision as to what the standards and expectations are … as the Treasury marches on," he said.
Still, some observers expressed concern that the FDIC's letter would not apply to institutions that have taken the biggest chunks of Tarp money.
We are "concerned that the major financial institutions that received over $150 billion in Tarp funds are not reporting what they're doing, and some of them are not providing sufficient credit," said Robert Gnaizda, the general counsel of the nonprofit Greenlining Institute. "If we don't address what the big ones are doing, it would be unfair to impose such requirements only on small banks."
Four banking companies — Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and JPMorgan Chase & Co. — have received the bulk of the funds under the capital program, but none would be bound by the FDIC's requirements.
At least one of those companies appears poised to reveal more data on its own, however. Sources said that Citi has prepared a letter from its chief executive, Vikram Pandit, to lawmakers with details of how the company has spent its Tarp money so far, what it intends to do with the rest, and what safeguards it has adopted to ensure its standards are met. The letter is not expected to be sent until after Citigroup reports its fourth-quarter results next week.
Banking industry representatives welcomed the FDIC's move.
"Banks are a little bit frustrated because we think we have a great story, and this may give us a format to tell that story," said Wayne Abernathy, the executive director of financial institutions policy and regulatory affairs at the American Bankers Association.
But he encouraged regulators to "come up with some sort of uniform guidance that would go to all of the various examiners."