US authorities on Monday unveiled details of a new aid plan for struggling banks that could lead to bigger government stakes but with a "strong presumption" that financial firms "remain in private hands."
Amid growing speculation about nationalisation, authorities said the Capital Assistance Programme would offer "mandatory convertible preferred shares," that could be turned into common shares "only as needed over time to keep banks in a well-capitalised position."
Analysts said the plan is the first step in the so-called "stress test" announced by the administration of President Barack Obama for banks hammered by the US housing meltdown and global credit crisis.
Augustine Faucher at Economy.com said the measures "set the stage for the federal government to take a greater ownership role in major US banks that face funding problems, short of total government ownership."
"The Obama administration is trying to avoid completely nationalising banks, while making sure they have enough capital to survive," Faucher said.
A joint statement from the US Treasury, Federal Reserve and banking regulators said that under the new program initiated on Wednesday, "the capital needs of the major US banking institutions will be evaluated under a more challenging economic environment."
The statement added that "because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Programme is that banks should remain in private hands."
The statement provided no details on capital injections to individual banks despite reports that the government might effectively nationalise some large banks on the brink of insolvency.
"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," the statement said.
"Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments."
But it said the preferred, nonvoting shares already injected into key banks could be converted into common shares under certain conditions.
"Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital," it added.
"Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis."
The new capital would "provide a cushion against larger than expected future losses."
Any government capital "will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalised position and can be retired under improved financial conditions before the conversion becomes
mandatory," the statement said.
The government could also convert shares obtained from capital injections under the Bush administration's Troubled Asset Relief Program, the statement added.
Kevin Giddis at Morgan Keegan called the plan "a good move for the banks and possibly bondholders, likely bad news for those who own shares in banks because of the dilution" of the shares.
Earlier, reports said the US government was in talks that could lead to a 25-40 percent government stake in Citigroup.
The Wall Street Journal reported Sunday that one plan would allow a portion of the 45 billion dollars in preferred shares held by the US government to be converted to common stock.
The government obtained a 7.8-percent stake in the bank in return for pumping capital into Citigroup.
The stock conversion would not cost the US Treasury additional money, but other Citigroup shareholders would see their shares diluted, the report said.
The paper said the talks reflect a growing fear that Citigroup and other big US banks could be overwhelmed by losses amid the recession and housing crisis.
Amid growing speculation about nationalisation, authorities said the Capital Assistance Programme would offer "mandatory convertible preferred shares," that could be turned into common shares "only as needed over time to keep banks in a well-capitalised position."
Analysts said the plan is the first step in the so-called "stress test" announced by the administration of President Barack Obama for banks hammered by the US housing meltdown and global credit crisis.
Augustine Faucher at Economy.com said the measures "set the stage for the federal government to take a greater ownership role in major US banks that face funding problems, short of total government ownership."
"The Obama administration is trying to avoid completely nationalising banks, while making sure they have enough capital to survive," Faucher said.
A joint statement from the US Treasury, Federal Reserve and banking regulators said that under the new program initiated on Wednesday, "the capital needs of the major US banking institutions will be evaluated under a more challenging economic environment."
The statement added that "because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Programme is that banks should remain in private hands."
The statement provided no details on capital injections to individual banks despite reports that the government might effectively nationalise some large banks on the brink of insolvency.
"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," the statement said.
"Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments."
But it said the preferred, nonvoting shares already injected into key banks could be converted into common shares under certain conditions.
"Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital," it added.
"Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis."
The new capital would "provide a cushion against larger than expected future losses."
Any government capital "will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalised position and can be retired under improved financial conditions before the conversion becomes
mandatory," the statement said.
The government could also convert shares obtained from capital injections under the Bush administration's Troubled Asset Relief Program, the statement added.
Kevin Giddis at Morgan Keegan called the plan "a good move for the banks and possibly bondholders, likely bad news for those who own shares in banks because of the dilution" of the shares.
Earlier, reports said the US government was in talks that could lead to a 25-40 percent government stake in Citigroup.
The Wall Street Journal reported Sunday that one plan would allow a portion of the 45 billion dollars in preferred shares held by the US government to be converted to common stock.
The government obtained a 7.8-percent stake in the bank in return for pumping capital into Citigroup.
The stock conversion would not cost the US Treasury additional money, but other Citigroup shareholders would see their shares diluted, the report said.
The paper said the talks reflect a growing fear that Citigroup and other big US banks could be overwhelmed by losses amid the recession and housing crisis.
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