January 15, 2009
Authored by: Walt Moeling
One issue that seems to be gaining traction is the need for banks to show how they are using TARP Capital, with a strong preference for the banks to be using TARP Capital to make loans. While the fungibility of bank capital makes it virtually impossible to directly tie any particular dollar of capital with any particular dollar lent, that fungibility also gives great leeway to community banks to demonstrate the lending impact of TARP Capital. Despite the political hot potato, we expect very few, if any, community banks to be criticized for their use of TARP Capital funds.
We do not believe that TARP Capital should fundamentally change the way in which bankers run their banks. Solely because they have TARP Capital, banks should not approve loans that they otherwise would turn down. However, any bank with additional capital, which TARP Capital provides, is in a better position to make or renew loans than that same bank would have been without TARP Capital.
A bank should be able to show that TARP Capital is “working” so long as its total loans are higher than they would have been without the TARP Capital infusion. In recognition of the current economic environment and capital restraints, we believe many banks would be actively attempting to shrink the size of the bank were they not to receive TARP Capital infusions. As a result, merely maintaining the current levels of loans could, in reality, be the result of TARP Capital increasing bank lending activity. Even Barney Frank’s proposed reform legislation acknowledges that TARP Capital may simply minimize the decline in lending that normally accompanies economic recessions. While this metric may be difficult for the Congressional Oversight Committee to accept, anytime the question is asked whether a new program is working, you have to make assumptions about what the situation would look like without the program.