Small banks in nervous wait for govt cash

By Diane Bartz - Analysis

WASHINGTON (Reuters) - Delays in getting federal bailout money to small and medium-sized American banks could weaken those institutions and leave them vulnerable to takeovers.

The Treasury Department's Capital Purchase Program, one aspect of the Troubled Asset Relief Program, was designed to funnel up to $250 billion into U.S. financial institutions in hopes the extra capital would spur banks to resume lending and get the U.S. economy moving.

But banking experts worry that the focus on getting large amounts of money to giant banks such as Citigroup, JPMorgan Chase and Co and Wells Fargo, which each got at least $25 billion, will inevitably make the most powerful banks even more powerful.

Banks make money by lending money. Cheap money from the government lent out at a profit translates to bigger profits.

"At the margin, as time goes by, the faster-growing banks tend to acquire the slower-growing banks," said Wayne Abernathy of the American Bankers Association. He predicted the disparity would make the economy less efficient.

A long list of the most powerful banks, including Bank of America and State Street, received substantial federal cash injections in October and November.

In contrast, a class of smaller subchapter S banks, named for a section of the U.S. tax code, were not able to apply for the money until January 14. Another 500 to 600 tiny mutual institutions, mostly located in New England and the Midwest, are still waiting to find out how to apply for the federal funds, said Abernathy, ABA's executive director of policy and regulation.

A subchapter S bank has 100 or less shareholders and usually does not pay corporate income taxes because its profits or losses are passed through to shareholders.

As of January 23, the Treasury had completed $194.2 billion of capital injections into 317 institutions.

Abernathy said the Treasury Department should speed up the process by accepting the recommendations of regulators who forward the applications. "Regulators have expressed a quiet frustration with how slow it's going," he said.

NEED TRANSPARENCY

Kevin Fitzsimmons, a bank analyst at the investment firm Sandler O'Neill, said there appeared to be a backlog in applications either at the Treasury Department or the Federal Deposit Insurance Corp.

"There's not a lot of transparency in the whole regulatory process," he said. "It could be just pure logistics that the government can't get through the applications fast enough."

Despite the clamor from some banks for the cash, Fitzsimmons said many banks that he follows declined it.

"A few banks said we don't need it and we're not asking for it. Some thought it was an insurance policy. Other CEOs said it's cheap funding and we would be at a competitive disadvantage if we didn't take it," he added. "(Others took it) to be a good citizen because they obviously felt that regulators wanted them to take the money."

H. Rodgin Cohen, a banking expert with law firm Sullivan and Cromwell, said small banks should get the same help as big banks.

"In smaller communities, the only people that are doing lending are small banks so leaving them out leaves small communities out," he said.

Cohen said he believed the program's problems would be worked out, and in rather short order.

"This (TARP/CPP) was put together very quickly. Remember this program began in October, you had a relatively small group of people, you have a series of crises sweeping through the financial sector," he said.

"I think what now really needs to be done is to reinvigorate the program. They need to get in and work on those applications."

(Editing by Tim Dobbyn)