Using the repayments to the Troubled Assets Relief Program that the federal government expects to get from some of the country’s biggest banks, the Treasury Department will broaden the ability of other, healthy banks to tap into federal funds, U.S Treasury Secretary Tim Geithner told a gathering of the Independent Community Bankers of America today.
The idea is to spur community banks as well as larger ones to lend more money to businesses and individual consumers. Speaking at the ICBA’s annual Washington policy summit, Geithner announced that, under its Capital Purchase Program, the government is planning to re-open the application period for banks with total assets under $500 million.
Further, it will raise the amount for which qualifying institutions to 5% of a bank’s total of all assets weighted for credit risk by a bank regulatory formula. Previously, viable banks could only apply for 3% of risk-weighted assets (or $25 billion, whichever is the lesser).
“Community banks have accounted for more than one third of the dollar volume of loans to small businesses – the businesses which in turn have accounted for the majority of new jobs created annually over the past decade,” Geithner said in his prepared remarks.
Although no large U.S. bank has paid back funds to TARP, the chief executives of JPMorgan Chase and Goldman Sachs Group have reportedly expressed the desire to do so.
Geithner said the window to apply or re-apply for CPP will be open six months. Previously, the application periods for publicly-held and privately-held financial institutions to take part in the CPP closed on November 14 and December 8, 2008, respectively.
Set up last October, the $250 billion Capital Purchase Program provides healthy financial institutions of all sizes with an optional extra layer of capital for to help support lending. Treasury has invested capital in the form of preferred stock in 579 institutions, of which over 300 are small banks.
Treasury spawned the CPP in October 2008 to stabilize the financial system by providing capital to viable banks. Under the program, Treasury provides capital to viable banks via the purchase of banks’ preferred shares. In return for its investment, the department gets dividend payments and warrants.