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Small banks feeling shut out of rescue program

Tuesday, 30 December, 2008.

Many small community banks are growing frustrated about their inability to access the government’s $700 billion financial rescue fund, nearly two months after large banks began tapping the fund for capital.

Trade groups representing the banks complain the delay is putting them at a competitive disadvantage to publicly traded banks, more than 50 of which have received capital injections.

“They took care of Wall Street first, and it seems like Main Street got left behind,” said Cynthia Blankenship, vice chairwoman of Bank of the West in Irving, Texas, which has $250 million in assets. Blankenship is also chairwoman of the Independent Community Bankers of America.

Some small banks carry troubled real estate loans and likely would benefit from the government cash, Blankenship said.

Publicly traded banks have been eligible since the Treasury Department began the $250 billion capital injection program Oct. 14. The department opened the program on Nov. 17 to about 3,800 small, privately held banks. A few publicly traded community banks already have received government money.

But the department has yet to issue the necessary guidelines for about 3,000 additional private banks. Most of them are set up as partnerships, with no more than 100 shareholders. They aren’t able to issue preferred shares to the government in exchange for capital injections, as other banks can.

Hundreds of the banks have applied for government money, but they can’t access it.

As a result, the government needs to figure out what it can receive in exchange for capital. Treasury officials say they are working on it.

“I have not seen a good answer yet,” said Neel Kashkari, director of Treasury’s Office of Financial Stability.

The vast majority of small banks are financially healthy, the ICBA says. Most did not get caught up in the housing meltdown that has so damaged Wall Street banks. But groups such as the ICBA say the rescue fund is supposed to be available to all healthy banks.

Banks that aren’t eligible may lose out to other lenders that have received government money, the American Bankers Association added in a letter Dec. 5 to Treasury Secretary Henry Paulson.

“They can only watch while many of their competitors, strengthened by capital injections from the government, seize opportunities to meet credit needs of their communities,” the ABA letter said.

Bert Ely, a banking consultant, said one possible solution would be for the government to receive some type of debt instrument rather than equity.

The Treasury Department has handed out more than $155 billion to 77 banks. Of that sum, $115 billion has gone to the eight largest, including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co.

Some smaller banks that haven’t yet been able to access the federal money are particularly irked by the efforts of nonbank financial institutions, such as life insurers and credit card companies, to get a slice of the money. At least four life insurers, including Hartford Financial Services Group Inc. and Genworth Financial Inc., are seeking to buy small thrifts to become eligible for the capital injections.

“The law was passed to help banks, and now companies are trying to get in front by becoming a bank,” said Paul Merski, chief economist for the ICBA, which has about 5,000 members. “It’s a little bit frustrating.”

The banks that aren’t eligible make up about one-third of community banks, which the Federal Deposit Insurance Corp. defines as banks with less than $1 billion in assets. Overall, community banks hold 11 percent of the industry’s total assets.

Still, they play a vital role in small business and agriculture lending, providing 29 percent of small commercial and industrial loans, 40 percent of small commercial real estate loans and 77 percent of small agricultural production loans.

The delay in accessing the rescue money is just one aspect of the program that has frustrated small community banks and their directors.

The government has said the $250 billion it set aside for capital injections is intended for healthy banks. Yet the money has been widely referred to in media reports as a “bailout.” As a result, many well-capitalized banks worry that if they take money from Treasury, their customers might see them as weak, Blankenship said.

Conversely, if they don’t receive any funds, customers might wonder if they were turned down, she said. Treasury lists banks that have received money. But it won’t say which banks have applied.

Source: http://www.delawareonline.com