WASHINGTON — Now that many small banks are staggering under losses from real estate and business loans, Sen. Jeff Merkley, D-Ore., said they deserve the same federal aid given to big Wall Street banks over the past year.
Merkley introduced a plan to bail out small banks on Wednesday — the same day the White House announced a similar idea to help community banks lend to small businesses.
Although economists have disagreed about the rationale for bailing out community banks, Merkley, the banking lobby and Cascade Bancorp CEO Patricia Moss have argued that helping smaller lenders would boost the economy by providing a key source of credit for small businesses.
“What it does recognize, is that we’re all in this economy together,” Merkley said Wednesday in a phone interview. “We can assist (small banks) by creating a program for them to access TARP funds, but do so in a responsible way.”
While it’s true that smaller banks provide more credit for local consumers and businesses, the economic rationale for saving them isn’t as strong as the justification that drove the bailout of the nation’s largest banks: Their failure threatens the entire U.S. economy, said University of Oregon economics professor Tim Duy. So far this year, 99 banks have failed, according to a count by the Wall Street Journal.
“If they’re profitable, one would expect other banks to emerge into these markets,” Duy said. “Should Small Bank A in Bend be closed, its assets would be purchased by Medium Bank B, and the lending would just be shifted from Bank A to Bank B.”
Merkley’s plan would work like a small-scale version of the bank bailout put in place as part of the $700 billion Troubled Asset Relief Program that passed last year.
For banks with less than $5 billion in assets, federal regulators would perform “stress tests” to gauge how much money small banks would need to weather the recession while increasing lending to small businesses.
The government would put up half of the needed capital, leaving the bank responsible for finding the rest from private investors. As a condition of receiving the money, banks would be required to increase small-business lending by 5 percent over 2009 levels.
The federal funds — up to $15 billion — would be drawn from the TARP program. The money would be given in exchange for preferred stock — nonvoting shares that would be repurchased with interest by the bank over time — in an arrangement similar to a loan. The bill includes penalties for banks that don’t increase lending and incentives for those that lend more than the federal targets.
Last week, Moss, who heads the parent company to Bend’s Bank of the Cascades, said an earlier draft of Merkley’s ideas made sense and would be a boon to smaller banks. Cascade Bancorp announced a plan to raise $70 million by selling stock, earlier this month, in order to shore up its finances, after being instructed to raise capitol by the Federal Deposit Insurance Corp. in August.
Merkley’s plan followed the outlines of a proposal advanced by the American Bankers Association earlier this year.
In testimony before the U.S. House Committee on Small Business on Sept. 23, Virginia banker and ABA member Austin Roberts III said that just $5 billion in TARP funds would invigorate lending by small banks.
That money, when matched by private investments, would let banks “continue meeting the credit needs of their communities without having to shrink to comply with minimum regulatory capital requirements,” Roberts said. “The comparatively small sums of money that would be invested in these struggling but viable banks would pay big returns for the communities they serve.”
Merkley introduced his bill a few hours before President Barack Obama announced his own plan to increase lending to small businesses.
In a speech in Maryland on Wednesday, Obama also argued that an injection of federal money for community banks would increase lending to businesses.
“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,” Obama said. “And when banks like these are hit by recession and financial crisis, creditworthy small businesses lose out.”
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