WASHINGTON — In an effort to tamp down rampant speculation that the government is preparing to nationalize one or more major financial institutions, the federal banking regulators released a joint statement Monday emphasizing their goal of keeping banks in the private sector.
"Because our economy functions better when financial institutions are well-managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands," regulators said.
They also released new details of planned stress tests of the largest institutions, which are expected to begin on Wednesday. The statement for the first time detailed the consequences for institutions that are deemed to have insufficient capital in the event of continued economic decline.
"Under this program… the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment," the regulators said. "Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government."
Regulators said the additional capital "does not imply a new capital standard and it is not expected to be maintained on an ongoing basis."
"Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers," regulators said.
Regulators said any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed to keep banks well-capitalized.
As rumors swirl over the fate of Citigroup and Bank of America Corp., regulators emphasized that major U.S. banks are still considered well-capitalized and that Treasury's capital program can continue to assist institutions.
"This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated," regulators said. "The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy."