DEFINITION of Capital Purchase Program - CPP
A program sponsored by the U.S. Treasury designed to provide new capital to banks, which will in turn allow them to loan more money to businesses and thus stimulate the economy. Under this program, the U.S. Treasury will purchase up to $250 billion of senior preferred shares of qualifying U.S. banks and savings institutions. Subscribing banks must be willing to sell an amount of stock equal to 1-3% of their risk-weighted assets.
Understanding Capital Purchase Program (CPP)
The Capital Purchase Program was offered to the financial community on October 14, 2008. To participate in the program, banks and savings institutions had to respond by November 14, 2008. The shares paid a dividend of 5% per year for the first five years, then reset to 9% per year thereafter.
According to a Government Accountability Office, CPP—which was part of the Troubled Assets Relief Program (TARP), was initially created by the Emergency Economic Stabilization Act of 2008, with the primary focus of purchase of mortgage-backed securities and whole loans. However, within two weeks of enactment, it shifted focus to the preferred stock model, ultimately proving capital to 707 financial institutions, across 48 states. Initially however, the following nine major financial institutions received funds on October 28, 2008:
- Bank of America Corporation
- Bank of New York Mellon Corporation
- Citigroup Incorporated
- Goldman Sachs Group Incorporated
- JPMorgan Chase & Company
- Morgan Stanley
- State Street Corporation
- Wells Fargo and Company
- Merrill Lynch
What Has Happened Since
Part of the TARP legislation overseeing the CPP mandated the strict monitoring of the program’s results, and the creation of annual reports by the Office of Management and Budget (OMB) on the program’s costs. The law also requires the Congressional Budget Office (CBO) to prepare its own reports within 45 days of the OMB’s reports, each year. Some key findings from the CBO’s March 2020 report are as follows:
- As of January 31, 2020, about 20 million of that stock remained outstanding.
- The CBO estimates a net gain to the government of $16 billion from the CPP in the form of dividends, interest, and other gains.
The financial institutions that remain in the program are continually subject to strict restrictions on the compensation they can provide to executives, as well as the dividends they may pay out to shareholders, as well as the amount of common stock they may repurchase.