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New bank plan offers lending incentive: Geithner

WASHINGTON (Reuters) - The Obama administration’s new plan to revive small business lending would reduce the cost of government capital for small banks as they make more loans, U.S. Treasury Secretary Timothy Geithner said on Tuesday.

“We’re trying to create strong positive incentives to lend in support of growing businesses,” Geithner told reporters in a conference call. “The more loans these banks make to these business customers, the better deal they are going to get.”

The program, which proposes carving out $30 billion from repaid bank bailout funds, aims to provide new incentives for small business loans and eliminate the stigma and restrictions that caused many smaller banks to shun the Troubled Asset Relief Program, known as TARP.

Under the plan, which requires approval by Congress, banks would pay a 5 percent dividend on the government capital they receive from the proposed Small Business Lending Fund -- the same as the initial TARP rate -- and this would decline to as low 1 percent as funds are loaned out.

They would receive a one-percentage-point decrease in their dividend rate for every 2.5 percent increase in incremental business lending demonstrated over a two-year period.

Banks could receive funds equivalent to 3 percent to 5 percent of their risk-weighted assets under the programs, depending on their size.

CONVERTING EXISTING TARP BANKS

The program also would allow banks with less than $10 billion in assets that currently have TARP funds to convert that capital to the new program. This would immediately lower their funding costs on loans already made with TARP money, assuming they have increased lending above a certain baseline.

Treasury officials view it as a way to persuade banks to stop hoarding their TARP capital and put it to work, and get banks out of the TARP program without repayments.

Any conversions of TARP funds, however, would come out of the same $30 billion cap for new capital, a Treasury spokeswoman said.

The Treasury did not have an estimate on how many banks were likely to convert to the new program, the spokeswoman said, adding, “We anticipate that it will be an attractive option to many banks.”

The plan drew a quick endorsement from the Independent Community Bankers Association, which said it was “strongly supportive” of the proposal. ICBA had been critical of many aspects of the TARP program, including dilution of their small shareholder bases from requirements to issue stock warrants to the Treasury.

Gene Sperling, a counselor to Geithner at the Treasury, said around 600 small banks had applied for TARP funds in early 2009, but decided to drop out of the program, citing the stigma associated with it. TARP restrictions include the capping of cash salaries at around $500,000 for executives at banks in the program, but this level is not considered a major problem for most community banks.

“The main barrier for them was the desire not to be labeled a TARP recipient,” Sperling said.

Even though many of these were strong institutions that had been encouraged by regulators to seek extra capital to help them weather the financial crisis, they soured on TARP after massive bailouts of American International Group AIG.N and other institutions sparked public outrage last spring, along with big bonus payments, Sperling said.

Instead of trying to design a new program within the confines of TARP, Sperling said the Treasury believed that it would achieve greater participation by creating a new program.

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