The reverberations from Bank of America Corp.'s decision to repay its bailout funds underscore the confusion about regulators' criteria for doing so.
Case in point: Some analysts surmise that Bank of America effectively set a new benchmark for companies seeking to follow it out of the Troubled Asset Relief Program when it projected a post-Tarp, Tier 1 common capital ratio of 8.5%.
But if the criteria for repayment revolved around that capital ratio, Citigroup Inc. already would be in the clear. It ended the third-quarter with Tier 1 capital at 9.1% of risk-weighted assets.
So was profitability the determining factor? If so, then Wells Fargo & Co., with its exceptionally strong pre-provision earnings compared with other big banks, presumably would be farther along in its repayment efforts.
The seeming randomness of regulators' selection of Bank of America to repay its Tarp money ahead of the others — random except for the company's failure to recruit a chief executive while operating under such tight government scrutiny — makes the process look all the more political, observers said. This perception diminishes the competitive pressures that Wells, Citi and other rivals might otherwise feel as continued beneficiaries of Tarp.
"My best guess is that every bank is going to be repaying, but there is a certain amount of review, with bank examiners signing off on the capital plans — just procedures that need to get done — before approval is given," said Ethan Heisler, a managing director at Hexagon Securities LLC in New York. "Certainly Citi has the cash resources to pay off the Tarp, and Wells is certainly ahead in terms of cash flow and earnings."
The fact that Bank of America beat them to the punch is incidental, not a clear indication that the company suddenly looks much healthier than its rivals, he added.
Citi declined to comment on the implications of the Bank of America announcement, and Wells offered no specifics about its intentions.
"We will work closely with our regulators to determine the appropriate time to repay the government's investment in Wells Fargo while maintaining strong capital levels," spokeswoman Julia Tunis Bernard said.
Though commentators have begun to place bets on who will follow Bank of America out of the program, it is unclear that any company still holding Tarp funds should be rushing to repay them.
"I just don't see what the upside is," said Mark Williams, a Boston University finance professor and former Federal Reserve bank examiner. "If we have a double-dip recession," he said, "bank earnings are going to be hit again."
Competitive considerations influence whether to hold on to Tarp money after rival companies have repaid. But these concerns seem more pronounced in the regional banking sector, where the absence of a "too big to fail" safeguard makes it all the more important for investors and customers to draw lines between banks that look safe and those that look risky.
At BB&T Corp., for example, executives "think their customers look at them in a much better light" because they have already left Tarp, said Adam Barkstrom, an analyst at Sterne, Agee & Leach Inc. "It definitely makes SunTrust and Regions look weaker relative to BB&T. But in the big, national bank space, I don't know that it really changes the game" for Bank of America to repay Tarp ahead of its rivals.
Besides, the remaining Tarp beneficiaries already have spent nearly six months weathering whatever reputational damage arose from not being among the first batch of repayers, a group that included JPMorgan Chase & Co. and nine other companies that left Tarp in June.
Meanwhile, as the market searches for clarity on what is required to be considered a healthy bank, the Tier 1 common capital ratio predicted by Bank of America could wind up having a major influence on the industry.
"If 8.5% is now the bogey or the perceived bogey for the market, then that's incrementally negative, especially for Wells, because they have a lot of capital to make up for to get to that number," said Barkstrom.
"If they wanted to repay the Tarp tomorrow" and have a capital ratio similar to Bank of America's, "the way we run it, it's going to be dilutive to [Wells'] earnings" by 10% to 15%, he said.
But until regulators lay out official criteria for repaying Tarp, there may be little need to panic.
"The only reason Bank of America is doing this is politics," Heisler said.
"The only reason why any bank at this stage would consider it, really, is politics."