Banking Law

A recent post to FinCriAdvisor (free registration required) gives some interesting insight on what we've previously described as the TARP Tar Baby: the difficult process of repaying TARP CPP investments to the U.S. Treasury Department.

Get ready to prove to regulators that your bank can survive for two years without TARP money - or forget trying to pay back the money now.

Bank of Marin Bancorp of Novato, Calif., repurchased $28 million worth of its preferred stock from Treasury on March 31, but not before going through a series of intensive regulatory hurdles.

"We had to project out capital and income and expected losses for two years," says Christina Cook, the bank's CFO. Regulators also "requested a lot of information about what the bank would look like immediately after" the money was returned.

The process described by Bank of Marin and other banks in this article sounds much like the "stress testing" that the country's 19 largest banks have been undergoing. The banks have to project a "worst case" scenario, and demonstrate to their primary federal regulator that they can survive the "worst case" without the TARP capital. Then, and only then, will they be allowed to pay back the capital.

The CFO of Old National Bancorp., which managed to pass the "stress test" and repay the Treasury Department, has some practical advice for banks that are thinking about repaying TARP investments.

"Make sure you have a very solid relationship with your primary regulators," Wolking says. "You want them as partners in the process. If you don't have a very good relationship with your regulator, the process is going to be very difficult."

I'm not sure how a bank with a lousy relationship with its regulator would have gotten the go-ahead for a TARP CPP injection in the first place. The program was designed for "survivors" so you would have to assume that participating banks are on their regulators' good side in the first place. Perhaps a good relationship will sour the minute the bank tells the regulator it wants to return the capital. Nevertheless, the advice is sound. As attorney Jeffrey Hare of Alston and Bird notes, "the bar is higher on the return than on the receipt side." You'll need all the support you can get to jump that high bar.

Other aspects of the process as described by participants and those who advise them are noteworthy:  it's not transparent, it's confusing, and it's uncertain.

Sounds like another typical government program to me. Banks can't get away with it, but their regulators can.