WASHINGTON — The Federal Reserve Board is pushing banks to figure out how they will repay government bailout money while also debating how it will clean up its own balance sheet.
The Fed has told nine banks that were part of this year's stress test but have yet to pay back funds borrowed through the Troubled Asset Relief Program to submit plans for repayment, a source familiar with the situation said Tuesday. The goal is to force banks to figure out how they will operate without the taxpayer money.
The nine banks, which include Bank of America Corp., Citigroup Inc., GMAC Inc. and Wells Fargo & Co., have borrowed $142 billion from the $700 billion Tarp.
The banks will have to prove to the Fed that they can raise common equity and hold more capital than was required under the stress test before being allowed to repay Tarp funds.
The Fed's request to banks was first reported by dealreporter.com.
It is unclear how much time the Fed is giving the banks to draft their reports.
The Fed, meanwhile, has its own eye on returning to more normal operations. Minutes released Tuesday of the central bank's policy meeting earlier this month suggest a lively debate over how to pull out all of the cash it has dumped on financial markets during the turmoil.
There seems to be broad support behind at least three potential ways to withdraw liquidity: increasing the interest the Fed pays on bank reserves, broad reverse repurchase agreements and creating separate accounts where banks can hold their reserves. The Federal Reserve Bank of New York said last month that it is already beginning to test the reverse repurchases.
But the real debate is whether the Fed should sell some of the assets that swelled its balance sheet to $2.2 trillion last week.
"Several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve's balance sheet and lower the level of reserve balances," according to the minutes.
"In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time."
But others at the Fed worried that such sales might have the effect of raising rates before the central bank is ready.
"They believed that other reserve management tools such as reverse [repurchases] and term deposits would likely be sufficient," according to the minutes.
In its two-day meeting earlier this month in which the federal funds rate was left unchanged, the Fed also noted "investor sentiment toward the banking sector appeared to deteriorate."
"Bank share prices fell, with equity prices for large banks declining more than those for regional and smaller banks," according to the minutes.
"Credit default swap spreads for large bank holding companies were about flat, but they widened for regional and smaller banking organizations. Market participants reportedly remained concerned about the earnings prospects for banks in an environment of weak economic activity and rising loan losses."
