WASHINGTON — Regulators and the Bush administration were working Friday to fix technical problems with their plan to recapitalize the banking industry.
Chief among them was a fear that the government's plan to take warrants in banks could pose accounting problems, sources said. At issue is a determination by many bank executives that the warrants, which would be issued in return for a capital injection, are treated as liabilities under generally accepted accounting principles. That would have earnings implications for banks and could dent regulatory capital - the exact opposite of what the administration is hoping to accomplish.
It appeared that at least two options were on the table Friday afternoon. The Securities and Exchange Commission could waive GAAP rules on the warrants. Treasury could also rewrite the provisions of the existing contracts over the weekend to address the concern.
Separately, banking regulators were expected to release a clarification soon saying banks can include Treasury equity stakes in Tier 1 capital. The Federal Reserve Board issued an interim final rule on the issue late Thursday to "immediately provide guidance to bank holding companies concerning the regulatory treatment of the stock."
Banking regulators have said a new rule for individual institutions is not necessary, though they are moving to clarify the situation to avoid any confusion.
Treasury officials were also working to solidify how banks would apply to receive the remaining $125 billion in capital injections available to institutions. An initial infusion of $125 billion has already been granted to the top nine institutions.
In a round of conference calls with the banking industry on Friday afternoon, Neel Kashkari, the interim assistant secretary of financial stability in charge of running Treasury's emergency rescue program, released a few new details.
He said banks would apply for capital through their primary regulator, who would conduct a review and make a recommendation to Treasury to decide, according to those briefed on the plan. Details on how to apply are expected to come out next week.
Foreign banks and insurance companies are excluded from the capital program, but the criteria for large and small banks will be the same, according to sources.
Under the terms, banks could apply for a capital injection equal to a maximum of 3% of risk-based assets. The total $250 billion being dispensed in capital is based on providing enough capital to cover 3% of all banks risk-based assets, Mr. Kashkari told industry representatives.
"That means there won't be any rationing," said Wayne Abernathy, assistant secretary for financial institutions at the American Bankers Association. "There will be enough for any bank that wants to participate. There's not going to be a need for any kind of Oklahoma land rush."
Capital will be made available to healthy institutions only — though that has yet to be defined — but healthy institutions could use the government's capital to buy a weak bank.
Treasury has said the capital is meant to provide opportunities for new lending, not to fill in holes caused by losses.
"They see it as a stimulus. If it works that way it could dwarf any of the stimulus projects that are being contemplated on Capitol Hill," said Mr. Abernathy. "We are talking about capital and every dollar of capital usually results in about $10 of lending, so if they can get all $250 billion placed that's about $2.5 trillion of new financial activity."
