By MEENA THIRUVENGADAM and MICHAEL R. CRITTENDEN
WASHINGTON -- U.S. officials unveiled details Wednesday of how they plan to convert preferred shares the U.S. Treasury holds in hundreds of financial institutions into common stock that would help banks survive an even worse-than-projected economic downturn.
Under the plan, which includes "stress tests" aimed at measuring how the banks would hold up under both baseline and extreme economic situations, institutions would have six months to raise private capital before getting a government-issued capital buffer.
"Supervisors will work with institutions to estimate the range of possible future losses and the resources to absorb such losses over a two-year period," banking regulators said in a joint statement. The adverse situation tests would assume a 2010 unemployment rate of 10.3%, Case-Shiller home price declines of 22% in 2009 and 7% in 2010 and gross domestic product contractions of 3.3% in 2009 and 0.5 in 2010.
Regulators expect to complete the tests by the end of April.
Any capital provided to the institutions under the new program, known as the Capital Assistance Program, would be preferred securities convertible into common equity at a 10% discount to the prevailing price as of Feb. 9. The securities will come with a 9% dividend and would be convertible at the issuers' request once supervisory approval has been received, the U.S. Treasury said Wednesday.
Participants in Government Investment Plan
If not converted or redeemed within seven years, the securities would automatically be converted into common stock.
Banks that have already issued preferred shares to the U.S. government under the Troubled Asset Relief Program's Capital Purchase Program would be able to convert those shares to the new convertible instruments. The government has so far invested more than $196 billion in more than 400 institutions through that program.
The new government investments require banks to submit plans for their use of government capital. Any bank participating in the program also will be subject to restrictions on dividend payments, share repurchases and acquisitions.
Banking regulators in their joint release said, "Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized."
The U.S. is requiring banks with assets of more than $100 billion to participate in the stress tests. Those banks will be given immediate access to government capital if needed.
Write to Meena Thiruvengadam at meena.thiruvengadam@dowjones.com and Michael R. Crittenden at michael.crittenden@dowjones.com
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