The U.S. government’s Troubled Assets Relief Program (TARP) is a positive for banks that tap the program, says Moody’s Investors Service in a new report. However, TARP likely won’t affect bank ratings.

“The TARP capital injection is coming at a time when banks have limited, if any, access to capital,” says one of the report’s authors, Moody’s vice president Jean-Francois Tremblay, “and it has the effect of immediately lifting regulatory capital ratios.”

However, he ads that, “since we do not consider the TARP preferred stock to be permanent, we will not be treating the TARP investment as 100% equity and, consequently, we do not expect upgrades of our bank ratings following an infusion of TARP funds.”

In Moody’s view, there are unique features in the TARP preferred stock that align most stakeholders in wanting to see the stock redeemed. It points out that the government and taxpayers do not want to be long-term owners of banks, and shareholders and bank executives are also aligned because there are restrictions on dividend increases, share repurchases and compensation.

“In addition”, Tremblay says, “when banks begin redeeming the TARP preferred stock, market dynamics will also be aligned because the repayment will be seen as a sign of strength by analysts and investors, and it will place significant pressure on others to follow.”

As part of its rating analysis, Moody’s says it will closely monitor banks’ use of the TARP funds as well as the longer term implications of banks’ capital management philosophy and policies. “We expect that banks will maintain prudent capital levels even after they call the TARP preferred stock — but, if not, negative rating actions may result.”

IE