U.S. Banking System is Solvent

The following is a joint statement by the Treasury, FDIC, OCC, OTS and the Federal Reserve:

“A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

“We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.

“Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.”


2 Responses to “U.S. Banking System is Solvent”

  1. 1 LK Economics February 23, 2009 at 5:57 PM

    We need to be confident that the banking system will be there for us. If we do not have the support of the banks were would we be? I believe we would go deeper into debt with a panic from the public and business wondering how we can support the businesses and pay for the employees, benefits, etc. It’s good to know they are not just lending the money to anyone but as they said to creditworthy borrowers.

  2. 2 Edward Murray March 2, 2009 at 8:06 AM

    The US banking system is solvent and the Tooth Fairy will bring you a dime when you lose a tooth.

    Until someone eats the difference between inflated asset prices and their actual value and all the derivatives that were built on the inflated values, the banking system is paralyzed because everyone is afraid of holding promises from someone who has to eat a big pile of loss.

    It seems obvious that there will continue to be paralysis no matter how much money we shove into the pockets of bankers until these losses are recognized and dealt with. See Japan for an example of how to keep pretending the banks are okay for 15 years or so.

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