Factsheet on Capital Purchase Program
The Capital Purchase Program (CPP) is a voluntary program in which the U.S. Government, through the Department of Treasury, invests in preferred equity securities issued by qualified financial institutions. Participation is reserved for healthy, viable institutions that are recommended by their applicable federal banking regulator. Treasury’s intent is to provide immediate capital to stabilize the financial and banking system, and to support the economy. It is vital that lending be available to families and businesses – consumers and businesses need access to credit, to pay for college or to invest and create jobs. A necessary precursor to lending and economic recovery is a stable, healthy financial system. Healthy banks, not weak banks, lend to their communities and the CPP is a program for healthy banks.
CPP is not a “bailout.” The program is designed to generate a positive return over time to the taxpayer while strengthening the backbone of and providing confidence to our nation’s financial system. Healthy banks of all sizes have signed up for the program, including small, large, local, and regional and national banks. There is a substantial demand for the program: the number of applications under review at the regulators is in the thousands, representing every state in the country. Hundreds more have already been pre-approved by Treasury. As of March, Treasury has funded over 500 institutions from all parts of the nation, including small and medium-sized institutions and community development financial institutions (CDFIs).
Across the country, there are many banks that are fundamentally sound, but hesitant to lend. During this unprecedented crisis, all banks and financial institutions are feeling the strain of the troubled market conditions which has suddenly and dramatically impaired the capital of many otherwise healthy banks. The level of confidence between banks and financial institutions is also low, so banks are unwilling to lend to each other. Restoring capital and confidence is essential to allowing the financial system to work effectively and efficiently. These steps are necessary but are likely not themselves sufficient to achieve economic recovery. We are confident that capital investments provide the foundation to enable banks to redeploy capital and continue lending.
Program Goals: Treasury established the CPP in October 2008 to stabilize and strengthen the U.S. financial system by increasing the capital base of an array of healthy, viable institutions, enabling them lend to consumers and business. Purchasing equity in healthy banks around the country is the fastest, most direct and effective method to inject much-needed capital into the system.
To achieve the program goals of restoring stability and confidence to the system, Treasury has created a program that is attractive to financial institutions representing every banking market in the nation. Treasury has established terms to ensure broad participation of financial institutions of all sizes across the country including small and community banks, privately-held banks, and S-corps, in addition to the larger banks that play a role in virtually every community. The program is also designed in a way to allow banks to seek alternative sources of capital in the public markets. Banks will have the capability and incentive to increase their lending above the level that they would have lent without the additional capital. The provision of credit that is vital to our economy may not materialize as fast as any of us would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks.
Institutions: The total “eligible” pool of financial institutions is about 8,400 of which 1,800 are public, 3,475 are private with institutional shareholders, 2,500 are S-Corps and about 625 are mutual companies. Treasury has allocated a sufficient amount of funds- $250 billion total- to the CPP so that all qualifying banks can participate. This program is not being implemented on a first-come-first-served basis, but on a rolling basis as regulators and Treasury evaluated applications received. All institutions, both large and small, participate under the same general terms.
Application Process: Treasury worked with financial regulators to design the application process. There is a single, streamlined application form that qualified and interested financial institutions submit to their primary regulator – the Federal Reserve, the FDIC, the OCC or the OTS. This application form is available on the websites of the primary federal regulator and all interested financial institutions apply through their regulator.
The application deadline for publicly-held institutions was November 14, 2008, the deadline for applications from eligible privately-held financial institutions was December 8, 2008, and the deadline for S-corps was February 13, 2009. Treasury is currently working on the development of a term sheet for mutual institutions. The federal banking regulators are evaluating all submitted CPP applications and continue to send qualifying applications to Treasury for final approval.
- To apply for the capital program, banks should review the program information on the Treasury website and then consult with their primary federal regulator. After this consultation, institutions should submit an application to that same primary federal regulator. Treasury has worked with the regulators to establish streamlined evaluations; this means that all regulators will use a standardized process to review all applications to ensure consistency.
- Once a regulator has reviewed an application, it will send the application along with its recommendation to the Office of Financial Stability at the Treasury Department.
- After Treasury receives the application with the regulator's recommendation, Treasury will review it and decide whether or not to make the capital purchase. Treasury welcomes the expertise of the financial regulators, and will give considerable weight to their recommendations.
- Finally, all transactions will be publicly announced within 2 business days of execution. Treasury will not, however, announce any applications that are withdrawn or denied.
This efficient process – with standardized forms and standardized review –encourages banks and thrifts of all sizes to participate in the program.
Terms of Contracts: The CPP is a voluntary program whereby Treasury has made a long-term investment in financial institutions of all sizes in order to stabilize the financial sector, enabling the flow of credit to businesses and consumers, and our efforts since the establishment of the CPP have prevented a system-wide collapse. In order for the program to work –for the system to be stabilized and confidence to return to markets- Treasury created terms that would be attractive to banks during an unprecedented crisis when there was no other capital available.
During the first five years of this investment the taxpayer will be paid a dividend of 5% per year on the senior preferred shares. This coupon steps up to 9% per year in the sixth year. Moreover, participating public institutions issue warrants to purchase common stock having an aggregate market price equal to 15% of the senior preferred investment. These warrants provide taxpayers an opportunity to participate in the equity appreciation of the institution. Terms applicable to private (non-S-Corp) institutions differ only with respect to warrant requirements. Private companies grant warrants for additional shares of preferred stock equal to 5% of the investment, which are exercised immediately and pay a coupon of 9% per year. S-corps issue subordinated debt which pay interest at 7.7% per year for the first five years and 13.8% per year thereafter.
Under the terms of the agreement, the Treasury will not exercise voting power with respect to any shares of common stock issued under the warrants. Likewise, the Senior Preferred will be non-voting, other than with respect to class voting rights on situations that could adversely affect the taxpayer.
Treasury is in the process of selecting equity asset managers to manage the portfolio.
