Four Regional Banks Are First to Repay U.S. Aid
Wednesday, April 1, 2009
Four regional banks from around the country yesterday became the first firms to repay emergency aid from the government, but the show of strength also underscored concerns about the health of a key element of the federal economic recovery program.
The Treasury Department has invested almost $200 billion in more than 500 banks to support new lending to consumers and businesses, but the growing clamor among recipients to repay the aid earlier than planned threatens to diminish the impact.
The largest bank to exit, Signature Bank of New York, which returned $120 million, said it was acting to avoid the effects of congressional restrictions on aid recipients, including limits on pay that could drive away its most productive employees. Chief executive Joseph J. DePaolo also said that the aid had become an undeserved scarlet letter because of public perception that the program was being used to save troubled banks, rather than buttressing healthy firms.
"We didn't want to be subject to taxpayer and lawmaker outrage," DePaolo said.
The repayments are the latest challenge for the investment program, which was introduced in November with the stated goal of investing $250 billion in thousands of banks. The Treasury immediately put half the money in the largest banks but since has distributed less than 60 percent of the remaining funds.
Most of the money has gone to the nation's 25 largest banks, which did not increase lending. Lending by the five largest banks fell at an annualized rate of 16 percent in the fourth quarter, Federal Reserve Governor Elizabeth Duke said in a speech Monday. Lending by the next 20 largest banks fell at an annual rate of 4.25 percent, Duke said.
Officials have said that the investments prevented an even larger decline. "We're pleased with the success of this voluntary program, which has helped bank lending remain resilient in the face of a severe economic downturn," a Treasury spokesman said yesterday.
The concern now is that repayments by healthier banks will pressure less healthy banks to follow suit when they should conserve resources and that it will damage confidence in banks that cannot repay the money.
The departures reflect changes in the original program. The Bush administration imposed few restrictions on recipients. But Congress grew increasingly convinced that the terms were too lenient, in part because aid flowed disproportionately to troubled banks.
In February, Congress imposed tighter pay limits on aid recipients. At the same time, it eliminated a requirement that companies raise money from private investors to replace the government funds, basically opening the exits for healthier banks. Companies still must secure permission from the Treasury, which is advised by the banks' primary regulator.
So far, only smaller banks have announced repayment applications. The largest, TCF Financial of Minnesota, is less than 1 percent the size of Bank of America. Several larger banks, including Goldman Sachs and Northern Trust, have expressed interest, but have not announced applications.