What is the 'Capital Assistance Program '

The Capital Assistance Program (CAP) was launched by the U.S. Treasury in February 2009, as part of a package of programs available to banks and financial institutions that were having trouble accessing funding in the wake of the financial crisis. The need for the program proved temporary as conditions for bank funding improved, and it was closed down in November 2009.

BREAKING DOWN 'Capital Assistance Program '

The Capital Assistance Program (CAP) was created as a core part of the Financial Stability Plan implemented to help banks access funding and maintain financial stability following the funding freezes associated with the financial crisis. Private sector funding to banks tends to dry up when there is concern that a bank has inadequate capital, as the bank may fail as a result. Confidence in such a situation is also key, to help prevent a bank run. The Treasury stated that the purpose of the CAP was to "restore confidence throughout the financial system that the nation's largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers."

Under the program, Federal banking supervisors conducted forward-looking assessments to assess what the capital needs of U.S. banks would be under adversely changed economic conditions. If it was determined that any bank would require a capital buffer, in the light of scarce private sector funding at the time, Treasury undertook to provide government funds to provide that buffer. This funding would be provided in the form of a preferred security, carrying a 9% dividend and convertible at the issuer's option, or after seven years into common stock if not redeemed or converted before that date. These terms were intended to incentivize banks to redeem the securities or replace them with private sector funding when conditions permitted. There were a number of conditions attached to using CAP, including oversight of executive compensation, restrictions on dividends and share buybacks, and scrutiny of capital and lending plans by the banks.

By November 2009, which was the deadline to apply for CAP, Treasury announced that it was able to close the program, with 18 of the 19 banks under assessment either having no further capital need or being able to fulfill that need with private sector funding. Only GMAC had indicated a capital need, and it would access that via the Troubled Asset Relief Program.

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