Several major banks that underwent the government stress tests of their ability to withstand a severe economic downturn have asked to repay TARP as soon as possible. The government has not yet announced who and when, and does not expect to until around the second week of June. Recommendations will likely come in batches rather than one bank at a time, the official said. 

But regulators worry that banks trying to get out of TARP are overestimating their prospects and could be forced to return for more money if the economy falls off a cliff. Experts believe the government will allow TARP recipients to repay funds only over time, perhaps 12 months, rather than all at once. Goldman Sachs Group Inc, JPMorgan Chase & Co, and Morgan Stanley have applied to repay TARP funds. 

Earlier this month, regulators told nine of the 19 big stress-tested banks that they did not need more capital. The government created TARP last fall to unlock the flow of credit after credit markets were brought to a near halt by shocks such as Lehman Brothers Holdings bankruptcy. At first, banks viewed TARP money as a positive, signaling government confidence. But TARP also allows the government to unilaterally impose restrictions, including on pay back, and many investors now believe holding bailout money signals weakness. 

Many banks have met major requirements to repay funds, including sales of debt not backed by the government. However, regulators have not made clear what other factors they are considering, such as how much can be repaid at once and on what terms, or what they will charge banks to buy back warrants giving the government a right to buy stock over time. Policymakers are causing confusion among large banks about what the Treasury Department must see before deeming a bank safe outside TARP, said a financial industry source familiar with the talks about repayment.  The Treasury Department is also concerned that if it lets some banks repay TARP but not others, investors will punish those banks deemed to be falling behind. 

Several analysts said many members of Congress are tired of throwing taxpayer money at the banking system. Lawmakers are eager for repayments but do not want the funds to go back into TARP, where the money could be available for future rescues.

Regulators have stress tested the 19 largest U.S. banks to determine their capital needs should economic conditions deteriorate further. Officials have said that they will release the results in some form this week. The markets are anxiously awaiting the results as investors try to figure out which banks are on the path to recovery and which might face pressure to raise more capital, possibly through government funds.

Investors have embarked on their own guesswork, crafting their own results of the governments’ tests. Some banks’ shares have already been punished following early leaked reports that they will need more capital. Citigroup may have to raise more capital, according to preliminary results of its stress test, people familiar with the matter said on Tuesday, and Bank of America Corp may need billions of dollars more, the Wall Street Journal has reported.

Most experts agree that the idea of the stress tests has changed since Treasury announced the exercise in February. The original intention was to use the tests to determine which banks might need to participate in a new government capital infusion program, but market appetite for information on banks’ health has expanded its significance. Officials have said that the public disclosures will likely allow outside analysts to test their own assumptions of the banks’ health against regulators’ assessments.

However, a document the Federal Reserve released last Friday revealing the underlying assumptions of the stress tests did not include many specifics. The government has to decide whether to release the results of individual banks next week, or just disclose summary information for all the tested banks. Regarding whether banks themselves self disclose, bank examination findings are generally exempt from U.S. Securities and Exchange Commission disclosure requirements. Some experts have argued that the stress test process has risen to the level of a material event that investors should be informed about.

The Fed met with 19 of the top financial institutions to go over the stress test results. In some cases, some of the tests with each party took less than 30 minutes.  In addition, several of the banks, when tested, mentioned a need for more capital, but no one yet knows who those banks are.  In fact, not all of the identities of the 19 financial institutions that were subjected to federal stress tests have yet been learned. Analysts believe that they likely include regional banks with large exposures to commercial real estate in the Midwest and Southeast. Those few that are familiar with the matter said at least three banks are in this position.

Government officials believe most banks, in need, can improve their capital footing without taking money from the government bailout fund. This could be done by raising funds from private investors or converting the government’s existing investments in banks into a new type of equity that would better cover banks in case of future losses. In another scenario the U.S. could end up owning large chunks of banks, raising the specter of something akin to nationalization. Federal officials have said any such move would be temporary.

Some banks could end up requiring a cash infusion from the U.S. Treasury. For those banks  it will become very difficult to obtain private funding.  The word from the Fed from all of their meetings was to zip up about the results of the test. However, as this is Washington, we should  know just about everything by Monday or Tuesday.