The New York Times
By: Rob Cox and Rolfe Winkler
February 1, 2010
President Obama's speeches suggest he doesn't dislike all banks, just the big ones.
Sounds good, doesn't it? After all, small businesses are the backbone of American employment. Giving them access to capital should help them invest and hire more people. And small banks, it would appear, are the most effective conduit for providing capital to small businesses.
According to the Independent Community Bankers Association, the primary lobbying group for the nation's 8,000 smaller banks, institutions with less than $1 billion in assets hold only 12 percent of all bank assets but have made 40 percent of the small business loans currently outstanding. Big banks -- those with $100 billion or more in assets -- made only 22 percent of such loans.
So Mr. Obama's idea sounds logical. But there are problems that would probably make any plan that the White House proposes both unworkable and bad for taxpayers.
First, community banks don't need the money. While the Federal Deposit Insurance Corporation regularly has to close down troubled small banks (including five on Friday), in aggregate, the industry is relatively flush. In the third quarter, banks with assets of less than $5 billion on average had tangible common equity equal to 9.62 percent of tangible assets. That's a stronger capital position than big banks, whose equivalent ratio stood at just 7.97 percent on average, according to SNL Financial.
Moreover, small banks appear to be hoarding the money they do have, lending out just 82 percent of their deposits. That's a lower loan-to-deposit ratio than the 91 percent at big banks. And it may not be their fault: the Federal Reserve's survey of loan officers released in October suggested that 35 percent of domestic banks were experiencing weaker demand for loans from smaller companies.
But even if that were to change, small banks are unlikely to accept bailout cash without major changes to the way the program has been administered so far.
Since the smaller banks don't really need the money, Paul Merski, the chief economist for the Independent Community Bankers Association, says they would want some conditions removed. Among the concessions they would expect are lower dividend payments to the government on any capital it lent them, no stock warrants attached to the investment, and no restrictions on executive pay.
These strings attached to the Troubled Asset Relief Program bailout were safeguards the Treasury imposed to protect taxpayer money. The Treasury invested $205 billion in 707 banks, receiving senior preferred stock or other securities. To date these have generated a 3.1 percent absolute return. Fold in the sale of warrants the Treasury received over stock in 34 of the banks and the return jumps to 8.8 percent.
Relaxing the requirements of the program rules would seem at odds with the president's other objectives of reducing debt and closing the yawning budget deficit. It's also not clear the Treasury could simply waive conditions without an act of Congress, where members may be disinclined to sanction another banking initiative financed by taxpayers.
The government could still try to ease the flow of money to small businesses in other ways. It could set up an entity to buy small-business loans from community and other banks, and then sell them on to investors.
This was the idea behind the Venture Enhancement and Loan Development Administration for Smaller Undercapitalized Enterprises, also known as Velda Sue, but that proposal never got off the ground.
The troubled experience of Fannie Mae and Freddie Mac, which play a similar role on a huge scale for mortgages, suggests that plan isn't so good, either. Indeed, add up all the elements -- slack demand for small-business loans, banks already flush with money and the potential for taxpayer losses -- and the conclusion seems clear.
The latest proposal to subsidize banks, even small ones, makes great political fodder. In any event, it's a bad idea.