Carrying through with his announcement in the State of the Union, on February 2, 2010, President Obama provided the outlines of a proposed $30 billion Small Business Lending Fund to provide capital to community banks, with incentives to increase small business lending. As proposed, the program will require Congressional approval to move the funds outside of TARP, which should remove the applicability of the executive compensation and governance restrictions and is also hoped to remove the stigma associated with TARP funds.
Based on the initial fact sheet, the terms appear generally comparable to the financial terms under the Capital Purchase Program, with reductions in the dividend rate for the first five years triggered by increases in small business lending. Every 2.5% increase in small business lending through December 31, 2011 over 2009 levels would trigger a 1% decrease in dividend rate, down to a minimum rate of 1%.
Banks with less than $1 billion in assets would be eligible to receive a capital investment of up to 5% of their risk-weighted assets. Banks with between $1 and $10 billion in assets would be eligible to receive a capital investment of up to 3% of their risk-weighted assets. Participation in the program will require approval by the bank’s primary federal regulator, although no details are available as to the standards that will be employed.
Obama Unveils New Regulations on Investment Banks
On Thursday, President Barack Obama unveiled a new set of proposals aimed at cutting the size and risk-taking behavior of the nation’s largest banks. The proposed restrictions includes size and complexity limits specifically on proprietary trading. The restrictions have been long advocated by former Federal Reserve Chairman Paul Volcker who chairs the President’s outside economic advisory board and met with the President before the announcement Thursday. The proposal could have the biggest effect on Bank of America Corp., Wells Fargo & Co., and J.P. Morgan Chase & Co., Goldman Sachs, Morgan Stanley, and Citigroup Inc.
Democratic Congressional Leadership Responds
In response to the President’s proposed new regulations, House Financial Services Committee Chairman Barney Frank (D-MA) said Senate Banking Committee Chairman Christopher Dodd (D-CT) would incorporate the restrictions into the Senate’s financial regulatory reform bill and that he (Frank) would push for the measures in conference committee. Frank also said the new restrictions would have to be phased in over 3-5 years to avoid ‘fire sales’ of bank divisions.
Obama Unveils Proposal on Bank Taxes
President Barack Obama unveiled a “Financial Crisis Responsibility Fee” yesterday, which, if approved by lawmakers, would go into effect June 30, 2010, and last at least 10 years. It would amount to 0.15% of total assets, minus high-quality capital such as common stock and disclosed and retained earnings. Insurance policy reserves and deposits covered by the Federal Deposit Insurance Corporation (FDIC) would not be taxed because such assets are already subject to federal fees. The tax would hit approximately 50 banks, insurance companies and large broker-dealers. Of those, approximately 35 would be U.S. companies, and 10 to 15 would be U.S. subsidiaries of foreign financial firms.
The tax is expected to raise $117 billion over 12 years, and $90 billion over the following 10 years. Approximately 60 percent of the revenue will come from the 10 largest financial firms. The White House plan excludes small banks and auto makers that accepted funds from the government’s Troubled Asset Relief Program. The banking industry strongly opposes the White House fee, calling it a political exercise that will stifle the economic recovery, force it to pay for the auto sector’s bailout, and ultimately burden consumers.
House Democrats Introduce 50% Tax on Bonuses
On Thursday, House Democratic lawmakers introduced a bill to slap a 50% tax on bonuses paid in 2010 by banks that took federal bailout funds. Rep. Peter Welch (D., Vt.) said the bonus tax proposal is “complementary” to the fee proposed by Mr. Obama.
In connection with the Senate’s rejection of the withholding of the second $350 billion under the Emergency Economic Stabilization Act of 2008, Director-designate of the National Economic Council, Larry Summers, submitted a letter to Senator Reid containing additional commitments of the Obama administration. The letter is generally focused on the use of the second $350 billion, but also contains several provisions that may affect existing TARP Capital programs.
The Obama administration has committed that the TARP funds will be used to protect the financial and housing markets, and will not be used to implement a broader industrial policy, and that at least $50 to $100 billion of the remaining funds will be allocated to an effort to address foreclosures. In addition, the letter highlights four areas of reform that it intends to implement:
- Provide a Clean and Transparent Explanation for Investments
- Measure, Monitor and Track the Impact on Lending
- Impose Clear Conditions on Firms Receiving Government Support
- Focus Support on Increasing the Flow of Credit
The letter provides that the Treasury will make a condition of federal assistance for healthy banks that they “will increase lending above baseline levels.” It appears that Treasury will require quarterly reports, perhaps in conjunction with Call Reports of SEC filings.
Among the conditions that Summers lists (which may or may not apply to TARP Capital investments), community bankers may find both positive and negative implications. On the positive side, the only additional limitation on executive compensation is that compensation “above a specified threshold” must be paid in restricted stock or similar form that cannot be liquidated until the government has been repaid. Substantive dividend restrictions appear limited to those banks that receive “exceptional assistance.” For all others, dividends must be “approved” by their primary federal banking regulator; presumably, federal banking regulators will continue to use the same standards to determine whether dividends are acceptable. “Summers also provides that the investments will be designed to “promote early repayment and to encourage private capital to replace public investments as soon as economic conditions permit.” The Obama administration will not permit government funds to be used to purchase “healthy” institutions.
Positively, the Summers letter specifically provides that funds should be provided to “ensure the soundness of community banks throughout the country.”