October 20, 2008 / 3:39 PM / 10 years ago

Treasury urges banks to deploy new government capital

WASHINGTON (Reuters) - The U.S. Treasury on Monday began taking applications from U.S. banks interested in tapping into the remaining $125 billion in a government equity infusion program, while making clear it wants new capital loaned out — not hoarded.

U.S. Secretary of Treasury Henry Paulson talks about financial markets and the Market Stability Initiative in the Cash Room of the Treasury Department in Washington, October 14, 2008. REUTERS/Larry Downing (UNITED

Issuing regulatory guidelines for a $250 billion plan created last week to shore up bank balance sheets, Treasury Secretary Henry Paulson said there was interest from a broad group of banks of all sizes.

The Treasury will have the final say on which banks get capital injections from the government in exchange for senior preferred shares, but it will consider a broad range of factors, including an institution’s health, lending ability and merger possibilities.

Half of the $250 billion fund has already been committed to nine of the largest U.S. banks, and others interested must apply through their primary regulatory agency by November 14.

Paulson emphasized that the program was designed for healthy institutions, to attract private capital and to encourage lending.

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending,” Paulson said in a statement.

Participating banks also are expected “to help struggling home owners who can afford their homes avoid foreclosure,” Paulson added.

However, a government stake in a bank is no guarantee that the Treasury will rescue the institution from financial trouble.

“An investment doesn’t say anything about whether a bank will be allowed to fail,” a U.S. government regulatory official told reporters.


The Treasury has no plans to expand the program beyond $250 billion, even if there is strong demand for government capital. The equity purchase fund was carved out of a $700 billion financial rescue package that was originally focused on purchasing distressed mortgage assets.

Because the injections are limited to 3 percent of “risk-weighted” assets for each institution up to $25 billion, the remaining $125 billion in the purchase fund would be enough for all qualifying, publicly traded institutions, the regulatory official said.

Foreign-controlled banks are not eligible.

The banking industry responded favorably to the additional details laid out on Monday.

“It will make it easier for us as an industry to make decisions for participation,” said Wayne Abernathy, a financial policy expert at the American Bankers Association.

Abernathy said the majority of banks still need more details before deciding if they will sign up. He said there are lingering questions on how S corporations and privately held banks will be handled, for example.

Some critics of the program have said banks may want the capital to strengthen their balance sheets, but will remain reluctant to lend as the economy deteriorates and financial turmoil rocks markets.

The regulatory official said banks would have an incentive to lend because they will want to seek a return on the capital, which is relatively cheap at a 5 percent dividend cost for the first five years. The government purchases prohibit them from increasing dividends or buying back their own stock.

“There are good banks that didn’t create the mess but their balance sheets are constrained,” the official said, adding that because of this, many of these institutions have had to pass up attractive, high-quality lending opportunities.

Abernathy said Treasury was headed in the right direction to remove a critical hindrance to participation — reputation risk. He said banks will appreciate how Paulson emphasized that the program is for “healthy institutions.”

“Without that, banks would’ve been very worried about the serious stigma attached to participating,” he said.

The industry is still concerned, however, about how much extra regulation participating banks might be subjected to, especially if supervisors will be second guessing lending decisions.

“Bankers need to know how much interference they’re going to have with how they run their businesses,” Abernathy said.

The Treasury intends to move quickly on the decisions, but would not provide an estimate for how many banks it expects to apply. Officials also declined to say what would cause a bank to be denied an investment.

The Treasury said it would announce transactions within 48 hours of their execution, but will not announce any applications that are withdrawn or denied.

“This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,” Paulson added.

Reporting by David Lawder, additional reporting by Karey Wutkowski, Editing by Andrea Ricci and Jan Paschal

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