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Board Report:  September 30, 2009

The Board's Processing of Applications for the Capital Purchase Program under the Troubled Asset Relief Program


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The Emergency Economic Stabilization Act of 2008, Public Law No. 110-343, authorized the TARP. Under the TARP's CPP, the U.S. Department of the Treasury (Treasury) is authorized to fund qualified financial institutions with up to $250 billion of capital through the purchase of preferred shares or senior securities of the qualifying institutions. In general, financial institutions request participation in the CPP by submitting an application to the appropriate federal banking agency, which reviews the application and makes a recommendation to Treasury on whether a CPP request should be approved or denied.

We completed an audit of the Board's processing of applications for the CPP. In addition to obtaining an overview of the Board's CPP implementation, our audit objective was to assess the Board's process and controls for reviewing CPP applications from Board-supervised financial institutions seeking to participate in the CPP. To accomplish our objective, we analyzed guidance provided by Treasury and procedures developed by the Board, assessed and compiled summary information on Board-supervised institutions that applied for CPP funds, interviewed Board and Federal Reserve Bank staff, and tested a sample of applications processed by the Board to determine compliance with Treasury and Board procedures. We also reviewed confidential examination reports and other supervisory data for these financial institutions.

Overall, we found that the Board's limited internal procedures were consistent with Treasury's guidance for reviewing applications and making recommendations for funding. In addition, we found that the Board's recommendations for approval to Treasury generally reflected compliance with Treasury's guidance and the Board's internal procedures. Our testing identified some compliance deficiencies, such as incomplete documentation of the analyses of the institutions' capital, asset quality, earnings, and liquidity; missing quality assurance certifications by Reserve Bank senior officials; and a lack of documentation on analyses of institutions' ongoing viability. However, due to compensating controls at the Board, we did not identify any instances where these deficiencies led to the approval of financial institutions that did not meet eligibility criteria or that otherwise should not have been approved.

We found that the Board received limited guidance from Treasury in the early stages of the CPP program regarding the analysis that should be performed to determine the viability of the financial institutions. As the Board reviewed applications under the limited guidance, Board officials raised issues to Treasury officials that resulted in additional Treasury guidance. The Board sent email messages to the Reserve Banks outlining procedures for processing the applications and additional analysis to be performed in reviewing the applications.

Although not required by Treasury, we believe that formal, detailed, and documented procedures would have provided the Board and the Reserve Banks additional assurance of consistently and completely analyzing CPP applications. As the CPP application phase draws down and the Board's efforts become more focused on reviewing the CPP-funded institutions' requests to repay the funds (called redemptions), we recommended that the Board implement a complete, formal, and documented set of procedures to guide the analysis of redemption requests.

We also found that, while the Board had established tracking systems to document outside contacts regarding the CPP program and the Board's responses, CPP-related communications between Reserve Banks and financial institutions had not been documented and tracked. While we did not identify any improper communications, we recommended that, going forward, the Board develop a system to track relevant communications between Reserve Banks and financial institutions regarding CPP and redemption requests. The Acting Director of Banking Supervision and Regulation agreed with our findings and stated that corrective actions are being taken.