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Dreher Tomkies LLP
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Columbus, Ohio 43215
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GUIDANCE ON MONITORING USE OF FUNDING FROM FEDERAL FINANCIAL STABILITY AND GUARANTY PROGRAMS

The Federal Deposit Insurance Corporation (FDIC) recently issued a Financial Institution Letter recommending that state nonmember institutions implement a process to monitor their use of capital injections, liquidity support and/or financing guarantees obtained through recent financial stability programs established by the Department of the Treasury, the FDIC and the Federal Reserve. See FIL-1-2009 (Jan. 12, 2009). In particular, the monitoring processes should help to determine how participation in these federal programs has assisted institutions in supporting prudent lending and/or supporting efforts to work with existing borrowers to avoid unnecessary foreclosures. Given that government funds, capital and guarantees are being used to support banking institutions, banks are expected to document how they are continuing to meet the credit needs of creditworthy borrowers, as described in the November 10, 2008, "Interagency Statement on Responsible Lending" (see FIL-128-2008). The FDIC encourages institutions to include a summary of this information in shareholder and public reports, annual reports and financial statements, as applicable.

The FDIC is the first banking agency to provide guidance on monitoring, but other agencies likely are considering the issue. In a January 13, 2009 speech on Review of the Financial Market Crisis and the Troubled Assets Relief Program (TARP), Interim Assistant Secretary for Financial Stability Neel Kashkari recognized that “[p]eople recently have begun to ask what the banks are doing with the money we've invested in them.” Kashkari explained that Treasury has been working with banking regulators to design a program to measure the activities of banks that have received TARP capital. He then outlined plans to (i) compare quarterly call report data from TARP recipients with data from comparable institutions that have not received TARP capital investments and (ii) collect data monthly from the largest TARP recipient for a more frequent snapshot.

The Department of the Treasury also is working to increase the transparency and accountability of financial stability and guaranty programs. On January 28, 2009, the Department announced a new policy of posting investment contracts for future completed TARP transactions to the Department's website within five to 10 business days. For contracts already completed, documents will be posted on a rolling basis, beginning with the first nine contracts completed under the Capital Purchase Program (CPP), contracts for transactions closed under the Systemically Significant Failing Institutions (SSFI) program, the Targeted Investment Program (TIP) and the Automotive Industry Financing Program (AIFP). See www.treas.gov/initiatives/eesa /agreements/index.shtml.

Other federal programs include (i) the Federal Reserve Board’s Term Asset Backed Loan Facility (TALF) (see DTS Alert dated January 9, 2009) and (ii) the FDIC’s Temporary Liquidity Guaranty Program.

In light of these regulatory developments, financial institutions that have participated in any financial stability or guaranty program should be sure to implement policies and procedures to track and report on use of funds.

  • Margaret Stolar and