Community bankers to Obama on TARP: Thanks, but no thanks

A key element of President Obama’s efforts to create new jobs for the American economy is a proposal to redirect $30 billion in Troubled Asset Relief Program (TARP) funds to community banks, which would then lend the money to small businesses.

The problem with this proposal, outlined Wednesday in Mr. Obama's State of the Union address: Community bankers don’t want any money associated with the TARP program. In addition, they say that they have plenty of money to lend to small businesses right now, and that there just isn’t any unmet demand for loans. Even if they had higher demand, they say, bank regulators are telling them to tighten lending standards to minimize losses.

“We are appreciative that the administration has kept community banks in mind,” says Paul Merski, senior vice president and chief economist at Independent Community Bankers of America in Washington. “But unless Congress can quickly pass a restructuring of the TARP funds, its useful life is used up.”

Congressional restructuring of TARP funds, even for job creation, is considered a very long shot.

“The whole TARP program is perceived as a misadventure by the public,” says Dennis Jacobe, chief economist for Gallup Inc. in Washington. “I think it is greatly disliked.”

Congress is well aware that voters are angry over the use of the TARP funds, says Mr. Jacobe. Last week, Senate Democrats barely defeated (53 to 45) an amendment by Sen. John Thune (R) of South Dakota to end the TARP program. No matter what, new loans under the TARP program end this October.

To entice community bankers to use TARP funds, says Mr. Merski, Congress would have to change restrictions on dividend payments, a provision that gives the government partial ownership in the recipient banks, and the cap on executive compensation.

“The key is to remove all those onerous restrictions,” says Merski, who doubts Congress would agree to do so. “On top of that, the cost of the TARP funding is extremely expensive, so they would have to change all these rules and restrictions to make it viable.”

This is not to say that small and mid-size banks have not borrowed from TARP in the past. According to Merski, some 650 banks – the vast majority of them small and mid-size – have borrowed from the program. But the largest dollar amounts went to the largest banks, which have for the most part paid back the money.

Even if Congress took such action, most community banks already have plenty of money to lend, Merski says. “It’s really that small-business loan demand is down,” he says. “This is not a time for small business to take on more debt, when sales are down.”

For example, many small businesses have open lines of credit with their community banks, he says. But demand for using these lines is down 15 percent.

Even if demand were to increase, Merski is not so sure that bankers will be shoveling loans out the door. Regulators are telling bankers that they have to write down the value of their current loans to reflect delinquencies and other problems, he says. “There is no secret [that] lending was too lax. Now the pendulum has swung the other way.”

Once the economy recovers, community banks are likely to help facilitate economic growth. Half of all small-business loans of less than $100,000 come from the 8,000 community banks in the US. “The community banks are prolific,” says Merski.

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