This afternoon it was announced that the Fed says Banks must raise equity capital before it could repay TARP.

From Bloomberg,

The 19 largest U.S. banks will have to demonstrate they can sell new shares before they are allowed to repay their government stakes, the Federal Reserve Board said today.

The companies “must successfully demonstrate access to public equity markets,” the Fed said in a statement released today in Washington. Bank holding companies that want to repay Treasury funds also “must demonstrate an ability to access the long-term debt markets without reliance on the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.”

Almost immediately afterwards, JPM announced that it would be raising $5 billion in capital to repay TARP.

Now call me cynical, but it seems to me that the Fed is changing the TARP repayment rules to make it look like bank capital raises are being done to appease the Fed, not because the banks actually need the capital.   Perhaps this is an unintended consequence of the stress tests.   If JP Morgan had announced the need for capital out of the blue, I don’t think market would have taken it well, as it would have undermined the conclusion of the stress test and JP Morgan themselves – that they have adequate capital and are ready to repay.  Something tells me this is not the case and that the Fed is putting in additional hurdles to effectively give banks “cover” in raising more capital, without alarming the market.

Don’t get me wrong, I think its a good thing that JP Morgan is able to tap the capital markets and definitely a sign that things are getting better.  However, if the Fed “requirements” are being used to mask real capital needs, then the Fed is being used as marketing material, which is not its role in the markets.