CPP was the primary initiative under TARP for stabilizing the financial markets and banking system. Treasury created the program in October 2008 to stabilize the financial system by providing capital on a voluntary basis to qualifying regulated financial institutions through the purchase of senior preferred shares and subordinated debt. On October 14, 2008, Treasury allocated $250 billion of the $700 billion in overall TARP funds for CPP but adjusted its allocation to $218 billion in March 2009 to reflect lower estimated funding needs based on actual participation and the expectation that institutions would repay their investments. The program was closed to new investments on December 31, 2009, and, in total, Treasury invested $205 billion in 707 financial institutions over the life of the program. Through June 30, 2010, 83 institutions had repaid about $147 billion in CPP investments, including 76 institutions that repaid their investments in full. Under CPP, qualified financial institutions were eligible to receive an investment of between 1 and 3 percent of their risk-weighted assets, up to a maximum of $25 billion. In exchange for the investment, Treasury generally received shares of senior preferred stock that were due to pay dividends at a rate of 5 percent annually for the first 5 years and 9 percent annually thereafter. In addition to the dividend payments, EESA required the inclusion of warrants to purchase shares of common stock or preferred stock, or a senior debt instrument to give taxpayers additional protection against losses and an additional potential return on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulators and afterward to repurchase warrants at fair market value. While this was Treasury’s program, the federal bank regulators played a key role in the CPP application and approval process. The federal banking agencies that were responsible for receiving and reviewing CPP applications and recommending approval or denial were the Federal Reserve, which supervises and regulates banks authorized to do business under state charters and that are members of the Federal Reserve System, as well as bank and financial holding companies; FDIC, which provides primary federal oversight of any state-chartered banks insured by FDIC that are not members of the Federal Reserve System; OCC, which is responsible for chartering, regulating, and supervising commercial banks with national charters; and OTS, which charters federal savings associations (thrifts) and regulates and supervises federal and state thrifts and savings and loan holding companies. Treasury, in consultation with the federal banking regulators, developed a standardized framework for processing applications and disbursing CPP funds. Treasury encouraged financial institutions that were considering applying to CPP to consult with their primary federal bank regulators. The bank regulators also had an extensive role in reviewing the applications of financial institutions applying for CPP and making recommendations to Treasury. Eligibility for CPP funds was based on the regulator’s assessment of the applicant’s strength and viability, as measured by factors such as examination ratings, financial performance ratios, and other mitigating factors, without taking into account the potential impact of TARP funds. Institutions deemed to be the strongest, such as those with the highest examination ratings, received presumptive approval from the banking regulators, and their applications were forwarded to Treasury. Institutions with lower examination ratings or other concerns that required further review were referred to the interagency CPP Council, which was composed of representatives from the four banking regulators, with Treasury officials as observers. The CPP Council evaluated and voted on the applicants, and applications from institutions that received “approval” recommendations from a majority of the regulatory representatives were forwarded to Treasury. Treasury provided guidance to regulators and the CPP Council to use in assessing applicants that permitted consideration of factors such as signed merger agreements or confirmed investments of private capital, among other things, to offset low examination ratings or other weak attributes. Finally, institutions that the banking regulators determined to be the weakest and ineligible for a CPP investment, such as those with the lowest examination ratings, were to receive a presumptive denial recommendation. Figure 1 provides an overview of the process for assessing and approving CPP applications. The banking regulator or the CPP Council sent approval recommendations to Treasury’s Investment Committee, which comprised three to five senior Treasury officials, including OFS’s chief investment officer (who served as the committee chair) and the assistant secretaries for financial markets, economic policy, financial institutions, and financial stability at Treasury. After receiving recommended applications from regulators or the CPP Council, OFS reviewed documentation supporting the regulators’ recommendations but often collected additional information from regulators and the council before submitting applications to the Investment Committee. The Investment Committee could also request additional analysis or information in order to clear any concerns before deciding on an applicant’s eligibility. After completing its review, the Investment Committee made recommendations to the Assistant Secretary for Financial Stability for final approval. Once the Investment Committee recommended preliminary approval, Treasury and the approved institution initiated the closing process to complete the legal aspects of the investment and disburse the CPP funds. At the time of the program’s announced establishment, nine major financial institutions were initially included in CPP. While these institutions did not follow the application process that was ultimately developed, Treasury included these institutions because federal banking regulators and Treasury considered them to be essential to the operation of the financial system, which at the time had effectively ceased to function. At the time, these nine institutions held about 55 percent of U.S. banking assets and provided a variety of services, including retail and wholesale banking, investment banking, and custodial and processing services. According to Treasury officials, the nine financial institutions agreed to participate in CPP in part to signal the importance of the program to the stability of the financial system. Initially, Treasury approved $125 billion in capital purchases for these institutions and completed the transactions with eight of them on October 28, 2008, for a total of $115 billion. The remaining $10 billion was disbursed after the merger of Bank of America Corporation and Merrill Lynch & Co., Inc., was completed in January 2009. The institutions that received CPP capital investments varied in terms of ownership type, location, and size. The 707 institutions that received CPP investments were split almost evenly between publicly held and privately held institutions, with slightly more private firms. They included state- chartered and national banks and U.S. bank holding companies located in 48 states, the District of Columbia, and Puerto Rico (see fig. 2). Most states had fewer than 20 CPP firms, but 13 states had 20 or more. California had the most, with 72, followed by Illinois (45), Missouri (32), North Carolina (31), and Pennsylvania (31). Montana and Vermont were the only 2 states that did not have institutions that participated in CPP. The total amount of CPP funds disbursed to institutions also varied by state. The amount of CPP funds invested in institutions in most states was less than $500 million, but institutions in 17 states received more than $1 billion each. Institutions in states that serve as financial services centers such as New York and North Carolina received the most CPP funds. The median amount of CPP funds invested in institutions by state was $464 million. The size of CPP institutions also varied widely. The risk-weighted assets of firms we reviewed that were funded through April 30, 2009, ranged from $10 million to $1.4 trillion. However, most of the institutions were relatively small. For example, about half of the firms that we reviewed had risk-weighted assets of less than $500 million, and almost 70 percent had less than $1 billion. Only 30 percent were medium to large institutions (more than $1 billion in risk-weighted assets). Because the investment amount was tied to the firm’s risk-weighted assets, the amount that firms received ranged widely, from about $300,000 to $25 billion. The average investment amount for all of the 707 CPP participants was $290 million, although half of the institutions received less than $11 million. The 25 largest institutions received almost 90 percent of the total amount of CPP investments, and 9 of these firms received almost 70 percent of the funds. The characteristics Treasury and regulators used to evaluate applicants indicated that approved institutions had bank or thrift examination ratings that generally were satisfactory, or within CPP guidelines. Treasury and regulators used various measures of institutional strength and financial condition to evaluate applicants. These included supervisory examination ratings and financial performance ratios assessing an applicant’s capital adequacy and asset quality. While some examination results were more than a year old, regulatory officials told us that they had taken steps to mitigate the effect of these older ratings, such as collecting updated information. Almost all of the 567 institutions we reviewed had overall examination ratings for their largest bank or thrift that were satisfactory or better (see fig. 3). The CAMELS ratings range from 1 to 5, with 1 indicating a firm that is sound in every respect, 2 denoting an institution that is fundamentally sound, and 3 or above indicating some degree of supervisory concern. Of the CPP firms that we reviewed, 82 percent had an overall rating of 2 from their most recent examination before applying to CPP, and an additional 11 percent had the strongest rating. Seven percent had an overall rating of 3 and no firms had a weaker rating. We also found relatively small differences in overall examination ratings for institutions by size or ownership type. For example, institutions that were above and below the median risk-weighted assets of $472 million both had average overall ratings of about 2. Also, public and private firms both had average overall examination ratings of about 2. Bank or thrift examination ratings for individual components—such as asset quality and liquidity—exhibited similar trends. In particular, each of the individual components had an average rating of around 2. Institutions tended to have weaker ratings for the earnings component, which had an average of 2.2, than for the other components, which averaged between 1.8 and 1.9.