Category Archives: TARP

Using SBLF to exit TARP; cookie anyone?

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The Special Inspector General for the U.S. Treasury’s Troubled Asset Relief Program has reported that 137 banks out of the 332 banks participating in the Treasury’s Small Business Lending Fund used more than half of the funds disbursed by the program to exit from TARP.

This announcement will surprise you as much as the discovery that your child has eaten the cookies you set out on the counter to cool.

Launched in September 2010, SBLF was created by Congress for a specific purpose: to boost small-business lending. But Congress left the goods out on the counter, it allowed banks in TARP to access SBLF and it made no law prohibiting the use of the funds to repay TARP. It had communicated its intent for SBLF, without making a law.

In fact, Congress created an incentive for TARP banks to use SBLF in this fashion. “Several members of Congress voiced concerns that the program could serve as a vehicle for TARP recipients to refinance into SBLF under more favorable terms… TARP banks paying a dividend rate of 5 percent that transferred into the SBLF program had the potential to lower their dividend rate to 1 percent if they increased lending,” the Inspector General reported. “In addition, the SBLF dividend is non-cumulative, meaning that participants have no obligation to make quarterly payments as scheduled or catch up on missed payments, compared to TARP dividends, which generally are cumulative.”

In the middle of last year, the U.S. Treasury also notified small banks that it would begin to auctioning pools of stock from banks participating in TARP in the fall. The 200 banks that received the notice made up $2 billion of the Treasury’s then $11 billion TARP investment. Treasury cannot require banks to repurchase their own investments but Treasury can sell its TARP stock without the bank’s consent. And, if the bank didn’t have the capital to buy its securities back, its stock would be sold to the highest bidder. Is it any wonder the banks used SBLF to exit TARP? I had access to the cookies and I didn’t like the idea of others eating them, so I took one.

More than a majority of TARP community banks (320 out of 552) applied for SBLF funds. Banks selected for SBLF were required by Treasury to repay TARP in full, and Treasury allowed banks use SBLF funds to do so.

There is no doubt that the banks which used SBLF to exit TARP did not use the program in a way consistent with its purpose. Out the 137 former TARP banks in SBLF, over 96 percent did not significantly increase small business lending. They used $2.1 billion of the $2.7 billion they received to repay TARP.

There also was a significant difference in lending depending on whether the bank received only enough SBLF funds to repay TARP or received additional funds. TARP banks that received only enough funds to repay TARP have lent out significantly less than they received in SBLF funds – increasing lending by only 25 cents for each $1 in SBLF funds. TARP banks that received additional SBLF money beyond the outstanding TARP balance have increased lending by $1.67 for every $1 in SBLF funds. Non-TARP banks increased lending by more than three times that amount – $3.45 for each $1 in SBLF funds.

Even with such loose restrictions on the use of SBLF funds, Treasury only managed to invest $4 billion of the $30 billion available. And of that $4 billion, about 66 percent went to banks exiting TARP. Congress and President Obama successfully created a program which, in the majority of cases, only proved useful for those banks which had already been bailed out.

Perhaps now Congress will learn that in the arena of government handouts and chocolate chip cookies, creating something with the right intentions does not guarantee the intended result. I’m not getting my hopes up.

 

Does Treasury really understand small business?

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I have often felt that policy-makers inside the beltway just don’t understand small business. Even though they know that most of the job growth in this country comes from small businesses, they really don’t get how any operation with fewer than, say, 100 employees, can do anything worthwhile.

The Small Business Loan Fund is an eminent example. I wrote before that many of the banks that could really use money from the fund can’t apply for it. I was referring to banks with poor CAMELS ratings, but a reader pointed out to me that sub S banks can’t apply for the money either. Today’s American Banker newspaper carries an informative article on this topic.

Can you believe that Treasury comes up with a program designed to promote small business lending, and it doesn’t bother to include subchapter S or mutual banks? This is evidence to me that the folks at Treasury just don’t get small businesses. Sub S banks and small business lending go together like peanut butter and jelly. About a third of the nation’s banks have sub S status. How do you come up with a program and exclude the very portion of the industry that could benefit from the program the most?

The industry has been all over this. Here is a letter the ABA sent to Treasury last month. ICBA sent this letter earlier this week. It should not be difficult for Treasury to include sub S banks. All they have to do is follow the template the developed for TARP, another program that initially ignored sub S banks.

People wonder why bankers are skeptical of regulators and policy-makers. It’s because while they say they appreciate the role of community bankers and Main Street businesses, policy-makers and regulators often take actions which exclude, ignore or even deter them.

The politics of deposit insurance

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One of the good things to come out of the Dodd-Frank Act was the permanent increase in deposit insurance protection to $250,000 per account. Typically, Congress increases coverage when the national median household income reaches a level equal to about half of the deposit insurance cap. The current median household income for the nation is about $50,000, which was half the old coverage cap of $100,000 — time to raise the cap.

In 1980, when the cap was raised to $100,000 from $40,000, the median household income across the country was about $17,700. In 1973, when the cap was raised to $40,000 from $20,000, the median household income was about $10,500. In 1968, when the cap was raised to $20,000 from $15,000, the median household income was about $7,700.

Whether it makes sense to tie deposit insurance to median household income is a debatable point. Whatever the cap is, I like to see it tied to real economic data; I really don’t like to see the FDIC and the Deposit Insurance Fund manipulated for political purposes.

The increase to $250,000 may certainly have been the result of political horsetrading. In “On the Brink,” former Secretary of the Treasury Henry Paulson writes about a Sept. 30, 2008 meeting with top Treasury officials. He writes:

“We had a meeting Tuesday morning and then a conference call to discuss raising the FDIC cap on insured deposits from $100,000 to $250,000 per account as part of the TARP sweeteners.”

So the increase in coverage had nothing to do with the economy and appropriate levels of deposit insurance. It was all about getting enough support to pass TARP.

The $250,000 cap is a good thing, even if I don’t really like the way it was achieved.

What’s the trade-off for resolving TBTF?

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It’s crunch time in the Senate for financial industry regulatory reform. Sen. Dodd needs to get his bill passed by Memorial Day for a realistic shot at enactment into law this year.

For community bankers, it boils down to this question: Are the TBTF remedies in the legislation compelling enough for community bankers to accept additional regulatory compliance obligations?

Questions will always surround legislative efforts to resolve TBTF “once and for all.” There were a lot of people who thought we solved that problem in 1991 when FDICIA was passed, and clearly it is a bigger problem today than ever.

Resolution authority on TBTF needs to extend beyond the confines of the traditional banking industry so it can address situations like AIG. The House bill and the Dodd bill does, and that’s a good thing. But there will always be this question: Who exactly will qualify as systemically important? Is it just the 19 original TARP recipients? Is it the top 50 holding companies? Who are the non-bank companies that qualify? Who will pay into the pre-paid resolution fund proposed by the House legislation and the Dodd bill? What if a company that never paid into that fund needs special handling? What if the government decides a company that did pay into the fund shouldn’t be treated special?

And how strong will the resolution authority be if the legislation drops the pre-paid resolution fund concept, as apparently is being discussed in the Senate to win support from Republicans? 

Clearly, the largest banks in the country have a cost-of-funds advantage over community banks. But if the law does in fact end TBTF, will community banks make more money as a result of the new, level playing field?

From the perspective of sound public policy, we need to resolve TBTF, but if we do, I am not sure how much that will improve the lot of community bankers. The American taxpayer will benefit from the resolution of TBTF but only community bankers will pay any kind of a price (that is, additional reg burden). Some bankers will say it is worth that price, but I wouldn’t be surprised if some say it isn’t.

A couple of bad ideas

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President Obama wanted to hit the largest banks with a bailout fee; now the Congressional Budget Office has come out with a report saying consumers would end up paying that fee. Read about it here.

The president has also suggested that $30 billion in TARP funds should go to community banks to spur Main Street lending. Many bankers are lukewarm on the idea because there is such a stigma attached to TARP. Treasury is picking up on community banker reluctance and now I am hearing talk about the government giving the $30 billion to the Small Business Administration to make direct loans to small businesses. This, of course, would be a disaster. Bankers don’t need another government-sponsored competitor, and taxpayers don’t need a government lender with goals that put it at odds with safe and sound banking practices.

Would “responsibility fee” cause big banks to shrink?

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The president indicated in his weekly address that it was good to see banks paying back their TARP obligations (with interest) but “not good enough.” He scolded as audacious those who say “that it’s somehow unfair, that because these firms have already returned what they borrowed directly, their obligation is fulfilled.”

Leaving aside questions of whether it’s fair to change terms after repayment, or whether banks should cover the shortfall caused by non-bank TARP recipients, there is still the question of likely effect. In his earlier post, Tom conceded “a certain intellectual appeal” in the proposed fee. Mike Moebs, principal at a Lake Bluff, Ill.-based financial services consultancy, said that “for all the wrong reasons” President Obama may be doing a good thing by taxing big banks. “If the big guys are beyond their economies of scale, why not use the price mechanism?” Moebs said.

“In Great Britain they’re taking the likes of the Royal Bank of Scotland and Barclays and saying to Royal Bank of Scotland, you’ve got to get rid of 900 branches by the end of the first quarter of this year; Barclays, you have to get rid of 1,000 branches. That’s more of a hatchet-type of approach…but Obama is stepping in and saying, I’m not going to face those social and political consequences; I’m just going to tax you guys–and I’m not going to tax the small [banks]. So your prices for your services have got to go up, and the small guys [will] have a competitive advantage. Now, if you big guys don’t bring down your cost, the small guys are going to win.”

The tax could cause big banks “to reduce [their] long-term average cost of operation, which is what the economy of scale is, and get it back down [to where} the small guys [are],” Moebs said.

Meanwhile, the president discussed additional big-bank reforms today.

Would “responsibility fee” cause big banks to shrink?

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The president indicated in his weekly address that it was good to see banks paying back their TARP obligations (with interest) but “not good enough.” He scolded as audacious those who say “that it’s somehow unfair, that because these firms have already returned what they borrowed directly, their obligation is fulfilled.”

Leaving aside questions of whether it’s fair to change terms after repayment, or whether banks should cover the shortfall caused by non-bank TARP recipients, there is still the question of likely effect. In his earlier post, Tom conceded “a certain intellectual appeal” in the proposed fee. Mike Moebs, principal at a Lake Bluff, Ill.-based financial services consultancy, said that “for all the wrong reasons” President Obama may be doing a good thing by taxing big banks. “If the big guys are beyond their economies of scale, why not use the price mechanism?” Moebs said.

“In Great Britain they’re taking the likes of the Royal Bank of Scotland and Barclays and saying to Royal Bank of Scotland, you’ve got to get rid of 900 branches by the end of the first quarter of this year; Barclays, you have to get rid of 1,000 branches. That’s more of a hatchet-type of approach…but Obama is stepping in and saying, I’m not going to face those social and political consequences; I’m just going to tax you guys–and I’m not going to tax the small [banks]. So your prices for your services have got to go up, and the small guys [will] have a competitive advantage. Now, if you big guys don’t bring down your cost, the small guys are going to win.”

The tax could cause big banks “to reduce [their] long-term average cost of operation, which is what the economy of scale is, and get it back down [to where} the small guys [are],” Moebs said.

Meanwhile, the president discussed additional big-bank reforms today.

Would “responsibility fee” cause big banks to shrink?

Posted on by
Reply

The president indicated in his weekly address that it was good to see banks paying back their TARP obligations (with interest) but “not good enough.” He scolded as audacious those who say “that it’s somehow unfair, that because these firms have already returned what they borrowed directly, their obligation is fulfilled.”

Leaving aside questions of whether it’s fair to change terms after repayment, or whether banks should cover the shortfall caused by non-bank TARP recipients, there is still the question of likely effect. In his earlier post, Tom conceded “a certain intellectual appeal” in the proposed fee. Mike Moebs, principal at a Lake Bluff, Ill.-based financial services consultancy, said that “for all the wrong reasons” President Obama may be doing a good thing by taxing big banks. “If the big guys are beyond their economies of scale, why not use the price mechanism?” Moebs said.

“In Great Britain they’re taking the likes of the Royal Bank of Scotland and Barclays and saying to Royal Bank of Scotland, you’ve got to get rid of 900 branches by the end of the first quarter of this year; Barclays, you have to get rid of 1,000 branches. That’s more of a hatchet-type of approach…but Obama is stepping in and saying, I’m not going to face those social and political consequences; I’m just going to tax you guys–and I’m not going to tax the small [banks]. So your prices for your services have got to go up, and the small guys [will] have a competitive advantage. Now, if you big guys don’t bring down your cost, the small guys are going to win.”

The tax could cause big banks “to reduce [their] long-term average cost of operation, which is what the economy of scale is, and get it back down [to where} the small guys [are],” Moebs said.

Meanwhile, the president discussed additional big-bank reforms today.