World Crisis Online

p class=”partner”> By Rebecca Christie

(Adds reaction from bank spokesmen in sixth paragraph.)

March 4 (Bloomberg) — U.S. bank regulators are reviewing the liquidity plans of Citigroup Inc., Goldman Sachs Group Inc. and other big banks that used a government debt-guarantee program during the financial crisis, a Federal Deposit Insurance Corp. official said today.

About $267 billion in corporate debt remains backed by the Temporary Liquidity Guarantee Program, with 37 percent due to mature this year and the remaining $167 billion in 2012, said Jason Cave, the FDIC’s deputy director for complex financial institutions monitoring. He said banks need to make sure they have enough reserves to pay off their obligations and obtain new funding, especially before deciding whether to raise dividends.

The FDIC and the Federal Reserve “currently are evaluating the validity of liquidity plans at the biggest users of TLGP debt, and we will challenge assumptions that seem overly optimistic,” Cave said in prepared testimony for a Congressional Oversight Panel hearing in Washington today.

U.S. authorities are weighing how to supervise the nation’s biggest financial companies to prevent a recurrence of the 2008 banking crisis, which led the government to set up trillions of dollars in emergency backstops. The Dodd-Frank Act enacted in July gave the Fed and a council of regulators expanded powers to supervise systemically important institutions.

Winding Down

As the debt-guarantee program winds down, big banks need repayment plans that are “reasonable and practical” and that acknowledge that funding costs could rise, Cave said. “We want firms to be more prepared for the possibility that rates could increase or credit becomes restricted at the very point in which significant amounts of TLGP debt comes due,” he said.

Michael DuVally, a Goldman Sachs spokesman, and Danielle Romero-Apsilos of Citigroup, declined to comment.

Cave also said the debt-program review should be linked to the Fed’s study of dividend plans at big banks. He said it would be “short-sighted and inappropriate” to consider the issues separately.

“Regulators should not approve dividend and capital repurchases, which involve significant cash outlays by financial firms, until we are all fully confident that these firms will have the financial resources — under both normal and stressed conditions — to repay debt guaranteed by the FDIC,” Cave said. “It is of critical importance that financial institutions continue to restructure their balance sheets and extend their debt maturities.”

Dividend Policies

Large banks including JPMorgan Chase & Co., which also has outstanding guaranteed debt, have said they may want to raise dividends for the first time since February 2009, when the central bank issued a letter saying financial firms “should reduce or eliminate dividends” until earnings recovered and the economic outlook improved.

The Fed in November issued guidelines for how it will decide whether banks may increase dividends and buy back shares, and U.S. lawmakers responded with a Feb. 15 letter urging caution. The Fed subjected the 19 largest banks to stress tests of their capital levels and said it expects to begin responding to capital distribution requests in this year’s first quarter.

The FDIC has collected about $10 billion in fees on the debt guarantee program, which backed about $350 billion at its peak. Loss claims filed through the end of 2010 total $8 million, and losses through the end of the guarantee period are expected to be “limited,” Cave said.

A separate part of TLGP that guaranteed business checking accounts has lost $2.35 billion through the end of 2010. That program, which backed $834 billion in deposits at its peak, has collected $1.1 billion in fees, he said. If the collected premiums from both guarantee programs are more than their combined losses, any proceeds will go into the FDIC’s Deposit Insurance Fund.

–With assistance from Phil Mattingly in Washington. Editors: Mitchell Martin

To contact the reporters on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net;

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net