The U.S. government will eventually adopt a “bad bank” plan to purchase toxic assets from struggling lenders, despite avoiding such a solution so far, accountancy firm PricewaterhouseCoopers said Wednesday.

A government “bad bank” should be set up quickly and be focused on the largest institutions, the firm explained, noting that Germany, Switzerland and Ireland have already taken this approach.

“The crisis is about to enter a new phase where efforts to remove troubled assets from bank balance sheets must be accelerated,” PWC said. “U.S. government interventions to date have stabilized individual institutions, but have not created a functioning market and pricing mechanism and therefore have had little impact on reviving the broader markets.”

Some government initiatives have had the opposite effect, the firm added.

Thank you, Mike and Cam Fine, for your leadership of the ICBA and for your work on behalf of community banks.

Everyone here should know that three days after I was sworn in as Treasury Secretary, Cam Fine was in my office talking about the ICBA.

Community banks play a vital role in our financial system and a central role in our economy.

Yours are the banks where children open their first savings accounts and then come back years later to get a small business loan or to get help buying their first home.

In a time when financial innovation has put more and more distance between borrower and ultimate lender or investor, yours are the banks where staff and customers greet each other by first name, and where relationships still define the business of banking.

Of the over 8,300 banks in America, 92% are small or mid-sized banks, with assets below $1 billion.

And as a group, you entered this crisis on average with strong capital positions, and that has allowed many of you to be a source of credit during a period of enormous challenge for businesses and families across America.

Lending by small banks held up better last year than lending did overall, or by large institutions.

Community banks have accounted for more than one third of the dollar volume of loans to small businesses – the businesses which in turn have accounted for the majority of new jobs created annually over the past decade.

And your banks provide financial services to communities that would otherwise not have them.  Of the 9,800 banking offices located in communities with populations under 10,000, more than two-thirds are community banks. In these markets, the local bank is the essential and the indispensible provider of banking services and credit.

At a time when many Americans have lost faith in the financial system as a whole, a Gallup poll conducted in just the past week found that 69% of customers have a lot of confidence in small and medium size banks.

Collectively, you are a source of strength and resilience for the U.S. financial system.  And you will play a critical role in laying the foundation for economic recovery.

When President Obama took office, the country was facing a deep recession and a damaged financial system.

In the months immediately preceding our arrival, American employers were shedding jobs at an average of 700,000 a month, auto sales were plunging at a 38% annual pace, and new single-family home sales had fallen from their 2005 peak by three-quarters.

Facing these extraordinary challenges, this Administration and the Congress responded with extraordinary action. We enacted a historic economic recovery plan that is giving 95% of American households a tax cut, creating or saving 3.5 million jobs, and helping 1.4 million Americans purchase their first home by providing $6.5 billion in tax credits.

We have taken action to stabilize our housing market and avoid foreclosures; to boost new consumer and business lending by re-starting the market for securities; and to create a market for old mortgage loans and securities that are keeping banks from lending by weighing down their finances.

And we just concluded an unprecedented regulatory review of the nation’s largest banks to bring greater transparency and new capital into the financial system.

On the strength of these efforts, the financial system is starting to heal.  Concern about systemic risk has diminished.  And overall lending conditions have started to improve.

• Spreads for investment grade corporate bonds have fallen about 210 basis points and spreads on high yield corporate bonds are down about 800 basis points since the end of November.
• Risk premiums in short-term inter-bank markets have fallen 275 basis points over roughly the same period, and the cost of credit protection for the largest U.S. banks has fallen by about 150 basis points just since early April.
• With the help of our lending facility with the Fed, new securities issuance has started to revive.  Spreads for AAA credit card receivables ABS have fallen about 300 basis points from their peak.
• There has been more issuance of consumer asset-backed securities in the past two months than in the preceding five months combined.
• In our housing market, interest rates on 30-year mortgages have dropped to an historic low of 4.8%, and refinancing has surged. These are all welcome signs, but the process of financial recovery and repair is going to take time.

We have already seen a substantial amount of adjustment in our financial system.  Leverage has declined.  The more vulnerable parts of the non-bank financial system no longer exist.  Banks are funding themselves more conservatively.  These are necessary changes, and there is more restructuring ahead for the financial industry as a whole.  But a substantial part of the adjustment process is now behind us.

This has been challenging period for community banks, even though, on average, you were better positioned to withstand the pressures of recession.

That is why Treasury, working closely with the FDIC and the Federal Reserve, has worked hard to provide support for community banks.

The Capital Purchase Program, established last October, provides viable financial institutions of all sizes an optional extra layer of capital for to help support lending.

These programs have benefitted communities across the country.  Treasury has invested capital in the form of preferred stock in 579 institutions, of which over 300 are small banks. We have made investments of $1 million or less in 17 banks, $5 million or less in 147 banks and $10 million or less in 258 banks. We have also invested in 15 community development financial institutions.

One example is Farmers National Bank in Emlenton, Pennsylvania. Farmers National has around $400 million in assets and 12 offices throughout rural Western Pennsylvania. In 4 of those locations, they are the only bank in town.

Bill Marsh, the President of Farmers National, told us that he took a Treasury investment last fall because he wanted to make his viable bank even stronger and ensure that it could lend more aggressively.

With the $7.5 million investment, he has been able to expand lending to small businesses in his area.  Since January Farmers National has provided $18.2 million in commercial and small business loans, an increase from the last quarter of 2008, despite a worsening economy.

The bank helped two real estate investors purchase older properties and turn them into affordable single family housing units. That means contractors, plumbers, electricians, and roofers are all getting work. And they helped an aspiring small business owner buy a small furniture store which he is now expanding. That means new hires.

Another example is the Bank of Commerce in Charlotte, North Carolina, which has around $170 million in assets.  As the economy started to contract, their president, Wes Sturgis, wanted to make sure he had enough capital to generate growth going forward and capital from the Treasury allowed him to do that.

The $3 million Treasury invested through CPP meant Mr. Sturgis could lend more actively.  In the 1^st quarter Bank of Commerce issued $5 million in loans helping an insurance agency purchase an office building and enabling a local printer to expand his business and workforce.

The Administration fully supports the FDIC’s request to increase its permanent statutory borrowing authority from $30 billion to $100 billion under its line of credit with the Treasury Department.  This could prove an important step towards decreasing the FDIC assessment fees that your banks now face and that we know you are deeply concerned about.

We have also sought to ensure that small businesses can continue to grow and borrow from small banks such as yours.  Beginning with our Recovery and Reinvestment Act we put in place a strategy for small businesses that increases loan guarantees and temporarily eliminates fees on SBA loans.

On March 16 the President, alongside Cynthia Blankenship and myself, announced a new $15 billion initiative of direct purchases to restart the secondary lending market.  Together these measures are designed to give banks the confidence to lend and since March 16^th, SBA weekly loan volume is up 25%.

And today I want to announce additional action we are taking to ensure your banks have the capital you need.

Using the proceeds of the repayments we expect to receive from some of the largest banks, we plan to re-open the application window for banks with total assets under $500 million under the Capital Purchase Program, and raise from 3% of risk-weighted assets to 5% the amount for which qualifying institutions can apply. This applies to all term sheets – public and private corporations, Subchapter S corporations, and mutual institutions. Current CPP participants will be allowed to reapply, and will have an expedited approval process.

In addition, we will extend the deadline for small banks to form a holding company for the purposes of CPP.  Both the window to form a holding company and the window to apply or re-apply for CPP will be open for six months.

I want to close with a look ahead to the comprehensive regulatory reform efforts this Administration will propose in the coming weeks.

We have focused initially on addressing systemic risk, making sure those risks that arise are less threatening to stability and that the government has tools necessary to contain the damage they pose to the American economy.  As in any financial crisis, this damage has been brutally indiscriminate.  Ordinary Americans, small business owners, and community banks who did the right thing and played by the rules are suffering from the actions of those who took on too much risk.

Our goal is to limit the extent to which community banks and tax payers are forced to bear the burden of those institutions that take irresponsible risks. Capital, liquidity and risk management requirements must be more exacting for the largest, most interconnected institutions. They must be applied with a view not just to ensure the soundness of the individual institution, but to maintain the stability of the system as a whole.  They need to be strong enough so that the system can withstand the impact of the failure of large institutions.  As part of this we need to bring the markets where institutions come together, such as the derivatives markets, under a strong framework of oversight.

These changes will help prevent future crises and limit their severity.  They will have to be accompanied by stronger tools for resolving crises when they happen, including the ability for the government to act more quickly to contain the potential damage cause by the potential failure of a large complex financial institution.

We have proposed resolution authority to help fill that gap.  The proposal is structured as an extraordinary mechanism for extraordinary situations, and will be kept strictly separate from the existing FDIC deposit insurance fund.  With this authority, the financial costs of intervention would no longer fall to those institutions that played by the rules and made conservative and prudent choices.

We believe that the combination of smarter, tougher regulatory standards to mitigate risks and resolution authority to manage risks when they arise will create a system that is more stable and resilient.

These steps will help level the playing field.  They will help ensure that we preserve one of the most important strengths of the U.S. financial system, the thousands of community banks.

Thank you.

The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.

In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.

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from Reuters:

At least half of the banks pushed back against the preliminary findings of the tests, the Wall Street Journal said, citing people with direct knowledge of the process.

Citigroup’s capital shortfall was reduced to $5.5 billion from about $35 billion after bank executives persuaded the Fed to include future capital-boosting impacts of pending transactions, the story said.

Wells Fargo’s shortfall was cut to $13.7 billion from $17.3 billion and Fifth Third’s was reduced to $1.1 billion from $2.6 billion.

Read More

Good morning. I want to briefly share some news about our economy, and talk about the work that we’re doing both to protect American consumers, and to put our economy back on a path to growth and prosperity.

This week, we saw some signs that the gears of America’s economic engine are slowly beginning to turn. Consumer spending and home sales are stabilizing. Unemployment claims are dropping and job losses are beginning to slow. But these trends are far from satisfactory. The unemployment rate is at its highest point in twenty-five years. We are still in the midst of a deep recession that was years in the making, and it will take time to fully turn this economy around.

We cannot rest until our work is done. Not when Americans continue to lose their jobs and struggle to pay their bills. Not when we are wrestling with record deficits and an over-burdened middle class. That is why every action that my Administration is taking is focused on clearing away the wreckage of this recession, and building a new foundation for job-creation and long-term growth.

This past week, we acted on several fronts. To restart the flow of credit that businesses and individuals depend upon, we completed an unprecedented review of the condition of our nation’s largest banks to determine what additional steps are necessary to get our economy moving. To restore fiscal discipline, we identified 121 programs to eliminate from our budget. And to restore a sense of fairness to our tax code and common sense to our economy, I have asked Congress to work with me in closing the loopholes that let companies ship jobs and stash profits overseas – reforms will help save $210 billion over the next ten years.

These important steps are just one part of a broad effort to get government, businesses and banks to act more responsibly, so that we are creating good jobs and making sound investments instead of spending recklessly and padding false profits. Because American institutions must act with the same sense of responsibility and fairness that the American people aspire to in their own lives.

Nowhere is this more apparent than in our credit card industry. Americans know that they have a responsibility to live within their means and pay what they owe. But they also have a right to not get ripped off by the sudden rate hikes, unfair penalties, and hidden fees that have become all-too common in our credit card industry. You shouldn’t have to fear that any new credit card is going to come with strings attached, nor should you need a magnifying glass and a reference book to read a credit card application. And the abuses in our credit card industry have only multiplied in the midst of this recession, when Americans can least afford to bear an extra burden.

It is past time for rules that are fair and transparent. That is why I have called for a set of new principles to reform our credit card industry. Instead of an “anything goes” approach, we need strong and reliable protections for consumers. Instead of fine print that hides the truth, we need credit card forms and statements that have plain language in plain sight, and we need to give people the tools they need to find a credit card that meets their needs. And instead of abuse that goes unpunished, we need to strengthen monitoring, enforcement, and penalties for credit card companies that take advantage of ordinary Americans.

The House has taken important steps toward putting these principles into law, and the Senate is poised to do the same next week. Now, I’m calling on Congress to take final action to pass a credit card reform bill that protects American consumers so that I can sign it into law by Memorial Day. There is no time for delay. We need a durable and successful flow of credit in our economy, but we can’t tolerate profits that depend upon misleading working families. Those days are over.

This economic crisis has reminded us that we are all in this together. We can’t prosper by putting off hard choices, or by protecting the profits of the few at the expense of the middle class. We are making steady progress toward recovery, but we must ensure that the legacy of this recession is an American economy that rewards work and innovation; that is guided by fairness and responsibility; and that grows steadily into the future.

Thanks.

This afternoon, the Federal Reserve and the national banking agencies released the results of the stress tests – the most comprehensive, forward looking review of our nation’s largest banks ever undertaken. These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario. They will provide the transparency necessary for individuals and markets to judge the strength of the banking system.

This capital assessment is an important part, but just one part of the President’s comprehensive plan to stabilize and repair the financial system and help get credit flowing again. Over the last three months, we have put in place a series of programs to address the housing crisis, to help restart the securities markets that are critical to business and consumer lending, to catalyze small business lending in particular, and to help create a market for legacy real estate related loans and thereby help clean up bank balance sheets. 

Alongside these programs, we have worked to restore confidence in the banking system. The assessment announced today will help strengthen the lending capacity of banks, with greater transparency and actions to reinforce the amount of capital banks hold against the risk of future losses. Capital is critical to lending. Each dollar of capital generates up to 12 dollars of lending capacity. And each dollar of lending capacity helps businesses grow and reduces the cost of borrowing for firms and families.

• Greater disclosure will help improve confidence. Today’s results should make it easier for investors to evaluate risk and to differentiate across institutions. The stress test will help replace the cloud of uncertainty hanging over our banking system with an unprecedented level of transparency and clarity. This is important, as markets work best when they have full access to the information on which to make informed investment decisions. With better disclosure, private capital is more likely to flow into the financial system, which will accelerate the point at which banks can replace the government’s investments.
• Banks will be given a range of options to ensure they have a substantial capital cushion. Some institutions will be required to take steps to improve the quality and/or the quantity of their capital to give them a larger cushion to support future lending even if the economy performs worse than expected. These institutions have a range of options to raise capital in the private markets, including common equity offerings, asset sales and the conversion of other forms of capital into common equity. If these options are not sufficient, they can request additional capital from the government through Treasury’s Capital Assistance Program. Banks must submit a detailed capital plan to supervisors, who will consult with Treasury on the development and evaluation of the plan.
  
• Some banks will be able to begin to repay the government. Those institutions that do not need to raise additional capital will have the opportunity to repay the government’s existing capital investments. To do this, they will need to demonstrate that they are able to issue debt without FDIC guarantees, as some banks have already begun to do.

Going forward, in the event that financial institutions need significant government assistance in terms of the quantity or composition of capital, then in consultation with supervisors, Treasury will evaluate whether existing board and management are strong enough to restore the firm to viability without government assistance. Where Treasury does take common equity, we will seek to return the company to purely private ownership as quickly as possible, and will be guided by the basic principle that the best way to serve the interest of shareholders and taxpayers is to exert our influence only on core governance issues and not on day-by-day operations.

• This was a carefully designed, credible test. Banks supervisors applied a historically high set of loss estimates on securities and loans, as well as a conservative view towards potential earnings that could act as a buffer against those losses. Taking into account the banking system’s existing capital and reserves, the public now has a better idea of how much capital banks will need to ensure they have sufficient capacity to continue providing credit in a more adverse economic downturn. These are estimate of potential losses and earnings that could occur in the event of a more severe recession. They are not a prediction of where the economy is headed. The results are less acute than some had expected, in part because concern about the risk of a more severe recession have diminished, market have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increased capital.
  
• The banks that did not undergo the stress test will have access to capital on the same terms as the largest banks. To this end, the deadline for access to the preferred stock issued under the existing CPP has been extended for an additional six months, and Treasury will continue to examine other ways to ensure that small banks across the country can access capital so that they can continue providing credit to their communities. Supervisors will not extend the stress test to the rest of the banking system.

Our government has taken extraordinary actions to ensure the stability of our banking system because this is essential to contain the risk of a worse recession and to lay the foundation for a sustainable recovery.

With this support, and with the clarity provided by today’s announcement, banks should be able to get back to the business of banking. Those in leadership positions in our banks are going to have to work hard to repair the loss of confidence in the financial system and regain the public’s trust. They can do this by expanding lending to creditworthy families and small businesses that we depend on to generate economic growth. And they need to demonstrate that they are reforming compensation practices to reinforce limits on future risk taking. And this responsibility must be felt by all banks, including those that hope to be in a position to repay the government’s capital investments. 

Today’s stress test results are an important step forward in the Administration’s plan to lead us on the path to economic recovery. Americans should know that the government stands behind the banking system and that their deposits are safe. The actions taken by Congress, the FDIC and the Federal Reserve have improved market confidence and reduced the threat of systemic risk. Mortgage rates have fallen to historic lows, home refinancing has increased significantly, credit spreads have narrowed and companies in recent weeks have found it easier to issue debt to finance new investments.

This is just a beginning, however. Even with the recent signs of stabilization in economic activity, the economic still faces significant risks and challenges. The cost of credit remains exceptionally high. We have more work to do, and recovery will take time. But we are starting to see some signs of progress toward financial repair, and we will continue to work to expand the availability of credit and improve the impact our new set of credit and lending programs.