U.S. Banks Must Raise Debt Without FDIC to Repay TARP

(Bloomberg) -- Banks that want to exit from the U.S. government’s capital injections must demonstrate they can issue debt to private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.

The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.

The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.

Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust.

“My hope is this helps with clarity on who are the winners and who are the losers,” said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million.

Bank of New York

Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.

FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy.

The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.

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