Government sets rules for banks wanting to return bailout money

WASHINGTON -- The nation's largest banks that want to exit the financial rescue program will have to demonstrate to the government that they can survive without its support.

In a joint statement, Treasury Secretary Timothy Geithner and other government banking officials said Wednesday that the 19 largest banks seeking to withdraw from the $700 billion rescue program will have to prove that they can borrow money without the support of the Federal Deposit Insurance Corp.

The new rules for repayment of bailout money were issued by the Federal Reserve and the Treasury Department one day before the government is scheduled to provide the results of "stress tests" it ran on the 19 banks.

The statement said that the 19 banks will be allowed to exit the $700 billion bailout program only if they have the enhanced capital requirements called for in the stress tests.

In addition, they will have to show they can borrow money without the support of the emergency program established by the FDIC in October at the height of the financial crisis.

That program allows banks to borrow money at lower rates because the FDIC guarantees the bank loans. Banks have more than $330 billion in debt outstanding under the program.

Many banks have said they want to pay back the money they received from the bailout fund because they object to conditions Congress has imposed, including caps on executive pay.

However, the requirements being imposed on the large banks will mean that they will also have to demonstrate the ability to raise money through normal inter-bank lending, without FDIC guarantees, something that the healthiest banks have already begun to do.

The joint statement did not address another issue that could block some banks from paying back the bailout money: payments by the banks to the Treasury Department for warrants the government received to purchase stock in the banks.

Many banks are arguing that they should not be required to buy back those warrants. But others contend that taxpayers should get some return on the huge investments made in the banks.

The new rules on exit procedures for the 19 biggest banks were included in a joint statement issued by Geithner, Federal Reserve Chairman Ben Bernanke, FDIC Chairman Shelia Bair and Comptroller of the Currency John Dugan.

In that statement, the government said that any of the 19 banks found to need more capital will have until June 8 to get approval from their regulators on plans to raise the additional resources.

The joint statement said that bank executives will need to provide a "detailed description of the specific actions" they will take to boost their capital to the levels that the stress tests determine are needed.

Those plans can include raising more capital in the private sector, restructuring the capital they currently control, or selling off bank assets.

While the selected banks develop plans to raise capital, they also will be required to review their existing management, including the board of directors, to "assure that the leadership of the firm has sufficient expertise and ability to manage the risks presented" by the current economic environment, the statement said.

That environment includes the worst financial crisis in seven decades and a recession that is now the longest in the post-World War II period.

Treasury and the bank regulators gave the banks that will need to raise more capital until Nov. 9 to accomplish that task.

The government has said in the past that no large bank will be allowed to fail, and the statement said "the U.S. government reaffirms its commitment to stand firmly behind the banking system during this period of financial strain."

Officials also have said that if banks are unable to raise capital to meet the stress test requirements, they will be able to obtain support from the $700 billion bailout fund.