Every spring, the thawing of the Yellow River threatens lives and property across Inner Mongolia. Ice blocks break free and then pile up further downstream, causing floods and dam bursts. The Chinese army often has to shoot cannonballs at the ice to restore the river’s normal flow.
Governments around the world have taken a similar approach to freeing up the frozen banking system: blast away at blockages in liquidity so that banks can resume channeling funds to businesses. But it looks to be a long winter, as many lenders simply aren’t ready — or willing — to see their capital dislodged. As much as they may profess to care about corporate customers, commercial banks have made their own survival priority number one.
“A couple of years ago, banking was all about leveraging capital and growing [earnings per share],” says Michael Reinhard, CFO of National Penn Bancshares, a Pennsylvania-based community bank with $9 billion (€7 billion) in assets. “Now it’s about generating capital and preserving it.”
What do banks have to do before they feel comfortable making loans again? Plenty. For one thing, raising capital is still a struggle, despite the bailout largesse. Also, risk management, both credit and otherwise, has to be retooled, especially with regulators, shareholders and lawyers breathing down bankers’ necks. Then there is the problem of disclosure: almost everyone is clamoring for banks to come clean about the quality of their balance sheets, many of which — particularly in the US and the UK — are still riddled with toxic mortgage-related assets.
But the first order of business for banks is shoring up capital. Officials on both sides of the Atlantic contend that banks infused with government funds will have no choice but to lend the bailout funds or use them to absorb loan write-downs and restructurings.
By far the largest bailout, the US government’s Troubled Asset Relief Program (TARP), which evolved into the Capital Purchase Program (CPP) for injecting preferred capital into healthy financial institutions, had released $194 billion to 317 financial institutions by late January. In return for taxpayers’ money, the government took preferred shares that pay a 5% dividend, which rises to 9% after five years. “If a bank doesn’t put the new capital to work earning a profit or reducing a loss, its returns for its shareholders will suffer,” said the US Treasury’s interim assistant secretary for financial stability and TARP overseer Neel Kashkari in January.
Have programmes such as TARP freed up the flow of funds? At some banks, yes. For example, Independent Bank of Michigan, with $3 billion in assets, wrote $72.4m in new lending — equal to the total amount it received from TARP — during the one month it had the funds in its possession, says CFO Robert Shuster. National Penn Bancshares, which received $150m from TARP, has written several loans, including two totalling $19m — one to an outpatient medical facility whose lender wanted to exit the relationship and one to a retailer to finance holiday season inventory. “We don’t usually get involved in large business loans, but TARP made it a whole lot easier,” says CFO Reinhard.