On October 21, 2009, President Obama announced the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business.

Actual facts about the new program are currently very sparse.  A review of the currently available information does provide some details that may be attractive to community banks that current have TARP CPP funds, as well as those that currently do not have funds.  However, it does not appear that there will be any change in the Treasury’s determination of which community banks are eligible for TARP funds; participating institutions appear to still need to be viable without the funds.

There are three basic sources of official information:

  1. the text of President Obama’s speech in Landover, Maryland;
  2. the press release announcing the speech; and
  3. a fact sheet on the President’s Small Business Lending Initiatives.

Known Facts

  • The funds will be available to “viable banks with less than $1 billion in assets.”  The announcement does not give any indication that the Treasury will alter its existing viability standards.
  • Participants will be required to submit a small business lending plan explaining how the additional capital will allow them to increase lending to small businesses, and will be required to submit quarterly reports detailing their small business lending activities.
  • The initial dividend rate will be 3% rather than the 5% required under the current TARP Capital Purchase Program.  The dividend will rise to 9% after five years, consistent with the existing TARP Capital Purchase Program.  Presumably, Subchapter S institutions will receive a comparable reduction in the rate paid on the subordinated debt.
  • The amount of capital is limited to 2% or the institution’s risk-weighted assets.  This is less than the 3% permitted under the existing TARP Capital Purchase Program, and less than the 5% currently permitted for institutions that are less than $500 million in total assets.
  • The Treasury is working to finalize program terms “in the coming weeks.”
  • The Treasury will also determine how to handle existing Capital Purchase Program participants to allow them to replace existing capital with investments under the new program (effectively reducing their dividend costs in exchange for a commitment to increase small business lending).
  • Community Development Financial Institutions (CDFIs), including CDFI credit unions, will be able to apply for funds with a dividend rate of 2% for eight years, after which it will increase to 9%.

An Improved Focus on Community Banks

In his speech, President Obama explained the need to provide a new focus on the country’s community banks.

But to spur lending to small businesses, it’s essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on. These are the community banks who know their borrowers; who gave them their first loan; who’ve watched them grow from down the street — not from Wall Street. The large majority of the business loans from these smaller banks are not to major corporations — they’re to entrepreneurs like Joe and Doug. And when banks like these are hit by recession and financial crisis, creditworthy small businesses lose out, and that means less expansion and fewer new jobs just when we need them most.

And that’s why we must do more to give these new opportunities to smaller banks so that they have the ability to access capital — so that they can lend to small businesses in their communities. So under the new steps that we’re announcing today, if these institutions put forth a plan to increase lending to small businesses, we will help them get the credit they need to do it at rates that are more affordable than the ones offered to our largest financial institutions. And we will make capital even more affordable to the community development financial institutions that focus on providing credit to America’s small businesses in our hardest hit rural and underserved communities.

Other Initiatives

We are aware that Congress is considering a number of other legislative proposals designed to stimulate the economy, which may have a direct impact on community banks.  Based on our conversations with congressional offices, we understand that Congress is considering legislation that may provide other incentives for additional lending, a five year loss-carry back, as well as matching TARP funds for institutions that are able to raise money privately.

We have encouraged Congress to consider making TARP funds available to banks that are viable with the new capital on a pro forma basis, and that neither concentration levels nor CAMELS ratings should be determinative.  We believe these modifications, if accepted, would significantly improve the ability of the TARP Capital Purchase Program to have a significant impact on struggling community banks (and therefore also the communities that they support).