Struggling banks need government help, trade group says

By Binyamin Appelbaum and David Cho
Washington Post Staff Writer
Wednesday, February 3, 2010; A04

The head of a major trade group for community banks said Tuesday that the Obama administration's $30 billion program to spur small-business lending would not work unless the government offered money to struggling banks alongside stronger ones.

The warning from Camden Fine, president of the Independent Community Bankers of America, highlighted the basic problem that has stymied past government efforts to send aid through the banking system to the broader economy.

The government wants to give money to healthy banks that are best positioned to increase lending, but most of those banks don't want federal aid. Many weaker banks are eager for aid, but helping them is less likely to spur new lending.

The administration's latest attempt to square that circle is a proposal to offer money with few strings attached, at annual interest rates as low as 1 percent, to lure stronger banks. The administration is considering whether to include weaker banks, said a senior official who requested anonymity because the person was not authorized to speak publicly about the issue.

President Obama touted the idea Tuesday in Nashua, N.H., as he seeks to reclaim public support for his economic agenda.

"This will help small banks do even more of what our economy needs -- and that's ensure that small businesses are once again the engine of job growth in America," Obama said.

On Capitol Hill, the proposal, which would require legislation, got a frosty reception from some Democrats and Republicans.

Senate Republicans said the plan would increase the deficit. They said the money, which would come from the $700 billion that Congress allocated in fall 2008 to rescue the financial industry under the Troubled Assets Relief Program, should instead remain unspent.

"The money recouped from the TARP shall be paid into the general funds of the Treasury for the reduction of the public debt. It's not a piggy bank," Sen. Judd Gregg (R-N.H.) said during a hearing on the administration's proposed budget. "That's not what this money is for."

Treasury Secretary Timothy F. Geithner strongly defended the proposal at a separate hearing.

"If we do not succeed in repairing the damage caused by this crisis, if we don't succeed in getting growth back on track, having a growing economy again with businesses confident, we will not be helping our long-term deficits. They will be worse," he said.

The president first introduced the proposal during last week's State of the Union address as part of a package of measures aimed at increasing employment. Small banks would be offered up to $300 million at a 5 percent interest rate. If the bank increased lending by at least 10 percent over two years, the interest rate could fall to 1 percent.

Administration officials say that Congress must agree to eliminate conditions such as limits on executive compensation in order for the program to succeed in attracting banks. They say that hundreds of smaller banks decided not to take aid last year because of the stigma and strings attached to the original bailout.

The volume of small-business lending by smaller banks declined by about $8 billion, or 2 percent, from September 2008 to September 2009, federal data show.

But bank executives and industry representatives say that the program does not address key reasons for the decline. Many banks have plenty of money, but they are chastened after the excesses of recent years. Regulators also are urging banks to exercise greater caution. And fewer customers are seeking loans.

Fine said the program still could help a group of banks that need additional capital to return to health and start lending again.

"I have insisted that one of the features of this program that they send over to Congress would be to allow less well-capitalized banks entry into this program," Fine said. "There are hundreds -- between 700 and 1,000 banks out there that could really use this kind of program and, in order for this program to succeed, those banks are going to have to get permission to participate."

But Frank Sorrentino III, chief executive of North Jersey Community Bank, said he did not want the government to give money to weaker banks. He said his company raised $9 million from private investors in December to support expanded lending.

"If there are banks that can't raise capital on their own, maybe there's something wrong there," Sorrentino said.

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