FDIC Announces Monitoring Process for Financial Stability Programs

January 21, 2009 at 3:40 pm Leave a comment

In a recent financial institution newsletter (the Letter), the FDIC announced its “expectation” that state nonmember institutions institute a process to monitor “their use of capital injections, liquidity support and/or financing guarantees obtained through recent financial stability programs.”  (A copy of the letter is available here.)  The stated purpose of the monitoring requirement is to help measure the impact of recent financial stability programs on the lending practices of participating institutions.  Here’s a quick overview of the Letter:

  • Which institutions are covered by the Letter?  The Letter applies to all state nonmember institutions that have (1) received funds under the TARP Capital Purchase Program, (2) issued FDIC-guaranteed debt, or (3) received funding from the Federal Reserve’s expanded borrowing facilities.
  • What activities should be monitored?  Covered institutions should document how funds obtained from or guaranteed by federal liquidity-enhancement programs are used to promote lending activities, as described in the November 10, 2008, Interagency Statement on Responsible Lending (see FIL-128- 2008).
  • Why does the FDIC want to monitor the conduct of these institutions? According to the Letter, the FDIC expects the results of the monitoring programs to illustrate whether federal programs are supporting credit markets and strengthening bank capital.  In addition, the FDIC anticipates results of the monitoring processes should demonstrate whether participation in these federal programs has reduced unnecessary foreclosures.
  • How will a covered institution report the results of its monitoring program?  Covered institutions should be prepared to describe their use of federal programs during bank examinations.  The Letter also encourages covered institutions to summarize such information in published annual reports and financial statements.

This Letter probably represents the first of many reporting/monitoring requirements for institutions that participate in federal liquidity-enhancement programs like TARP or the Temporary Liquidity Guarantee Program.  Like all reporting requirements, covered institutions should begin implementing a compliance monitoring system now, so that all relevant information is available during examinations.

Entry filed under: Client Alerts, FDIC.

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