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On Monday, October 20, Treasury Secretary Henry Paulson announced how banks and financial institutions of all sizes can participate in the newly-created Capital Purchase Program (CPP). Under this program, the federal government will purchase equity in participating financial institutions to help restore credit markets.
The CPP will use up to $250 billion to purchase preferred stock in a variety of banks, savings associations, and bank/savings and loan holding companies. The program's goal is to infuse capital into the nation's credit markets and restore the free flow of capital and credit in the economy. The Treasury Department had previously announced that the country's nine largest banks would be participating in this program, but today's announcement paves the way for banks of all sizes to participate.
Secretary Paulson announced that the government will use a standardized application for participation in the CPP. The application is the same for all types of financial institutions, regardless of which federal regulator governs them. A link to the CPP application is below, and can also be found on the Web site of every federal bank regulator.
Secretary Paulson also explained the five-step process for institutions that want to participate in the CPP. This procedure will affect all institutions that apply for participation in the CPP before the deadline of November 14, 2008. Secretary Paulson emphasized that participation in the program will not be on a first-come, first-served basis, but rather that all applications will be reviewed using the same procedure and criteria.
The process is as follows:
1. Interested financial institutions should review the requirements of the program and consult with their primary federal regulator (i.e., the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, or the Office of Thrift Supervision).
2. Each applicant should submit the CPP application to its primary federal regulator.
3. The regulator will review the application, following standardized guidelines established by the Treasury Department. The regulator will then submit the application to the Treasury Department, along with a recommendation on whether the department should purchase equity in the applicant.
4. The Treasury Department's Office of Financial Stability will review the application and the regulator's recommendation, and determine whether to make a capital purchase. The Treasury Department will give "considerable weight" to the recommendation of the regulator that submitted the application.
5. All capital purchases approved by the Treasury Department will be announced within 48 hours after the purchase has been made. Any applications that are withdrawn or declined will not be announced, preserving some privacy for institutions whose applications are not accepted.
Institutions that participate in the CPP must agree to certain restrictions on executive compensation, including so-called "claw back" provisions and a ban on golden parachutes. Faegre & Benson will publish a separate update on these restrictions.
Text of Secretary Paulson's Remarks on CPP, October 20, 2008:
Application for Participation in the Capital Purchase Program