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The Purpose of the CAP

By Anonymous

Matt Yglesias badly misunderstands the purpose of the Treasury's Capital Assistance Program (CAP):

I thought the point of the [stress] tests was to open up the possibility that a minority of banks would be shut-down, while the others would be proclaimed healthy (as in actually healthy rather than "healthy given a government guarantee") and we could shift out of the implicit guarantee phase.

You thought wrong. That is not, and has never been, the purpose of the CAP. In fact, that's the exact opposite of the stated purpose of the CAP:

The purpose of the CAP is 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 CAP, federal banking supervisors will conduct forward-looking assessments to evaluate the capital needs of the major U.S. banking institutions under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, banks will have an opportunity to turn first to private sources of capital. In light of the current challenging market environment, the Treasury is making government capital available immediately through the CAP to eligible banking institutions to provide this buffer.

So, clearly, the whole point of the CAP is to avoid having any of the 19 largest U.S. financial institutions fail in the near-to-medium term. How does "avoiding the shut-down of major U.S. banks" become "open[ing] up the possibility that a minority of banks [will] be shut-down"?

Full post as published by Economics of Contempt on April 09, 2009 (boomark / email).