Conversations with each of the federal banking regulators over the last several days confirm what we have heard elsewhere: the distribution of TARP Capital that started out with a more liberal bias has now turned more conservative. Regulators have recently indicated that institutions with a CAMELS rating of 1 and 2 are almost certainly likely to receive an investment, while 3-rated institutions are now described as “perhaps” receiving an investment. 4 and 5-rated banks are unlikely to receive any TARP Capital, absent unique circumstances. (Just a few weeks ago, these same regulators were telling us that a 3-rated institution would be treated more like a 2-rated institution, and that 4-rated institutions would “perhaps” receive an investment.) This shift is certainly an outgrowth of Treasury’s position that the main test of which institutions will receive capital investments is assured long term viability.
What does this mean for the thousands of banks that will not receive funding? They certainly need to be considering a public relations initiative to manage or preempt the questions that will come at them from shareholders and the local media. Perhaps the conversation could be along the following lines: “(i) the banking industry did not ask for this plan (which has changed dramatically since it was first proposed); (ii) an investment by the Treasury in a bank is not an automatic guarantee that a particular bank will be successful and neither is a decision not to invest some sort of condemnation; (iii) our loan portfolio reflects our community and the real estate lending which helped our community grow is suffering; and (iv) we are here for the long run and look forward to meeting the credit needs of our customers for years to come. Together we will both survive the current economic challenges.”
Commentary: Big Picture Thoughts on Applying for TARP Capital
Whether to apply for or accept TARP Capital is a decision that each bank needs to make individually depending on its own markets and circumstances. However, as explained below, we believe each bank needs to prepare a realistic, worst-case scenario for the next three years. Unless your bank’s capital will remain strong, we think you should apply for TARP Capital.
In three years, your bank will likely be in position to redeem the TARP Capital. If that’s true, then the TARP Capital will have served as an inexpensive insurance policy that went unused, and you won’t be subject to any further government restrictions.
On the other hand, it is possible that, in three years, the financial condition of your bank makes you unable to redeem the TARP Capital. In that event, it is very clear that you needed the TARP Capital.
With only these two scenarios, we believe almost every bank is better off applying for TARP Capital.
Where is the Economy Headed?
As the residential real estate market declined, all the contractors and subcontractors associated with that market began to suffer. These contractors and subcontractors include our drywall installers, plumbers, painters, flooring specialists, lighting specialists, landscapers, pavers, pool installers, and numerous others – a vast group of construction and service-industry workers. With new residential starts drying up, and with in-progress projects shutting down, many of the employees in those contracting and subcontracting fields began to lose their jobs.
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