Hundreds of community banks may take cash

WASHINGTON (Reuters) - Hundreds of small U.S. community banks could take up a government offer of fresh capital that will give Main Street lending a crucial boost across the country, an industry group said on Monday.

"There could be several hundred community banks apply," Camden Fine, president of the Washington-based Independent Community Bankers of America, told Reuters.

The Treasury has earmarked $250 billion to recapitalize the country's financial system after losses sparked by the subprime mortgage crisis destroyed some of the oldest names in banking.

Community bankers in Virginia and Colorado separately said that they had been contacted by the U.S. Treasury over a capital injection, indicating the breadth of the plan and the extent that it could spur lending and spending.

Pushing capital into smaller banks all over America could have a significant cumulative impact.

"We're probably underestimating the power of this capital injection because it is filtering down to the smallest banks, and with that capital they will lend," said David Jones of DMJ Advisors in Colorado Springs, Colorado.

The capital injections are being carved from a $700 billion bailout agreed by U.S. lawmakers to limit the impact of a global credit crisis on growth and employment.

The country's nine largest banks have had a combined infusion of $125 billion, while 16 more U.S. banks have accepted a further $33 billion, in the hope that this will unlock frozen credit markets that has hurt U.S. business.

There are nearly 8,500 community banks in the United States, which include commercial banks, thrifts and mutual savings associations, and they range in size from a few million to a few billion dollars-worth of assets.

"The primary thrust of those banks...(is) to spur lending in their local markets, or to shore up their own capital from losses that they took," said Fine.

Community banks have lost between $20 billion and $25 billion alone on preferred stock they held in government sponsored enterprises Fannie Mae and Freddie Mac, Fine said. Fannie and Freddie were backstopped in September by the Federal Reserve to the tune of $200 billion.

Critics of the bailout claim that the bigger banks can take the government money and sit on it. Fine said that this was not an option for community banks.

"Unlike the largest banks, which many times have many other sources of income, community banks are heavily dependent on lending activities for their income. So the bulk of this money going to the community banks is going to be used for lending," he said.

(Reporting by Alister Bull; Editing by Leslie Adler)