NEW YORK (Reuters) - Many U.S. banks would rather return taxpayer money than face a growing litany of restrictions that come with it, but they may find regulators are in no rush to take it back.
For banks, taking money from the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program has morphed from a sign of strength last fall to a headache now.
In TARP’s initial phase, obtaining the money was seen as positive for a bank as the government indicated it would keep the weakest institutions out. Since then, some rules have changed, with recipients drawing intense public scrutiny on decisions such as pay, expenses and acquisitions.
Banks such as Goldman Sachs Group Inc, Morgan Stanley and Bank of America Corp have signaled their eagerness to pay back the money as soon as possible.
At least one influential U.S. lawmaker has said he supports banks paying back TARP. Barney Frank, chairman of the House Financial Services Committee, last month said the willingness of banks to repay should be seen as “an advantage.”
TARP recipients are allowed to return the money as long as they consult with regulators.
But banking experts said regulators will likely be wary of letting big banks, at least, repay TARP any time soon.
“They have to be very careful about sending any accidental signals,” said Seamus McMahon, an independent bank and regulatory consultant. “There is not much downside from (the regulators’) perspective to taking their time.”
Mindful of their role in keeping the financial system healthy, regulators would not want to allow banks to return money only to find later the repayment was premature and they needed new capital.
“They are going to want to be comforted that the bank really is just fine,” said John Douglas, a bank regulation partner at the law firm Paul, Hastings, Janofsky & Walker LLP. “I don’t think you are going to be able to go back to the well.”
Some banks such as Citigroup Inc and Bank of America have already had to go back for seconds after the initial TARP money ended up falling short of their capital needs.
The Treasury Department declined to comment.
Government officials would also have to be sensitive to what conclusions investors would draw if some banks gave back money but others did not. That could fuel concerns that banks holding on to TARP money are too weak to do without it.
“That’s a bad label,” said Jonathan Weld, a banking lawyer at Shearman & Sterling LLP in New York.
Indeed, the first TARP recipients last fall included banks that said they did not want the funds. Government officials told them all to accept it.
“They wanted to be absolutely sure that everybody took the money so they weren’t isolating somebody,” Weld said.
The Treasury is still talking about how to release results later this month from stress tests being conducted on 19 large U.S. banks.
It may report summary results that are not institution-specific, a source told Reuters on Tuesday. The source sought anonymity because a decision had not been made.
Regulators would at the very least want to wait for the results of these tests, which would assess banks’ ability to handle the economic downturn and need for more capital, before letting a bank return TARP money, banking experts said.
While results of the stress tests could allay some concerns about the ability of banks to get through the financial crisis, regulators may also face pressures on how Main Street feels about money given to Wall Street.
“There is a lot of political desire for the government to, if anything, do more and step in,” McMahon said. “If they are perceived to be backing off and that in turn is perceived as allowing for banks to pay people what they want and to lend or not lend as they see fit, there could be a populist backlash.”
To be sure, many taxpayers would be thrilled to have back the billions of federal dollars spent on bailout of the financial system -- a major source of outrage for many.
Partial repayments of TARP money could be seen as a wise gesture by banks, reflecting their intent to repay TARP and their ability to do so.
But it would still leave banks exposed to restrictions attached to the bailout funds.
In the longer term, the government would not want to stay closely involved with banks and having some money repaid would be a sign of success of the program, Shearman’s Weld said.
“Hopefully the climate now is a lot less threatening than when TARP was put together last fall,” Weld said.
Still, experts said regulators would want to be sure a bank was not getting ahead of itself in a bid to get the government off its back.
“Regulators by their very nature are conservative,” said Paul Hastings’ Douglas, a former Federal Deposit Insurance Corp general counsel. “And this is a time when that conservatism might be warranted.”
Reporting by Paritosh Bansal, editing by Matthew Lewis
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