Small Banks Remain In TARP: A Case Study
Keith Degmayr
Professor Maureen Keefe
BU4450
5 June 2012 Why Small Banks Remain In TARP
The Troubled Asset Relief Program (TARP) is a government program that was legislated into existence in October of 2008 with the passage of the Emergency Economic Stabilization Act of 2008. Emergency Economic Stabilization Act of 2008 provided authority for the Federal Government to purchase and insure certain types of troubled assets from banks. This was done in order to provide stability to and prevent disruption in the economy and financial system of the United States.1 It contains several initiatives. One of the initiatives included within it is the Capital Purchase Program (CPP). Under the Capital Purchase Program, banks received money from …show more content…
Three and a half years later, smaller financial institutions have been mostly unsuccessful in their efforts to exit TARP because they are having trouble procuring new capital to repay TARP funds, as the big banks are able to. The Wall Street Journal reported an estimate by Stonecastle partners, LLC, a New York firm that has invested in 800 community banks, that it will take $90 billion in fresh capital to clean up their balance sheets and acquire other institutions.7 In a quarterly report to congress, Christy Romero, Special Inspector General for the Troubled Asset Relief Program, reported this figure as well as a figure of only $23 billion in fresh capital for community banks to repay TARP or SBLF funds:
Industry experts say the amount of new capital needed by community banks nationwide is substantial. According to analysts with investment firms Raymond
James and Barack Ferrazzano Financial Institutions Group, and consulting firm
McGladrey & Pullen, LLP, it will take $23 billion in fresh capital for community banks to repay TARP or SBLF funds; to absorb credit losses and boost loan loss reserves; and to meet higher regulatory capital ratios. A higher estimate of $90 billion in community bank capital needs came from StoneCastle …show more content…
Citigroup’s recent proposal to buy back stock was rejected recently by the Federal Reserve, despite proposals from rivals J P Morgan Chase and Wells Fargo recently being accepted. Citigroup proposed a plan where the size of the buyback was based on a formula in which buybacks would be made over a two-year period if Citigroup hit certain targets11. The largest banks have indeed exited TARP 's Capital Purchase Program (CPP). However, as mentioned earlier, 351 regional and community banks remain in CPP. The Federal Reserve’s recent actions have allowed 137 banks to use The Small Business Lending Fund (SBLF) to refinance out of TARP 's Capital Purchase Program. The small-business lending program culled a large number of the more sustainable banks from TARP, while the remaining banks that have less capital, missed dividend payments or were subject to enforcement actions from their regulators must remain in
Professor Maureen Keefe
BU4450
5 June 2012 Why Small Banks Remain In TARP
The Troubled Asset Relief Program (TARP) is a government program that was legislated into existence in October of 2008 with the passage of the Emergency Economic Stabilization Act of 2008. Emergency Economic Stabilization Act of 2008 provided authority for the Federal Government to purchase and insure certain types of troubled assets from banks. This was done in order to provide stability to and prevent disruption in the economy and financial system of the United States.1 It contains several initiatives. One of the initiatives included within it is the Capital Purchase Program (CPP). Under the Capital Purchase Program, banks received money from …show more content…
Three and a half years later, smaller financial institutions have been mostly unsuccessful in their efforts to exit TARP because they are having trouble procuring new capital to repay TARP funds, as the big banks are able to. The Wall Street Journal reported an estimate by Stonecastle partners, LLC, a New York firm that has invested in 800 community banks, that it will take $90 billion in fresh capital to clean up their balance sheets and acquire other institutions.7 In a quarterly report to congress, Christy Romero, Special Inspector General for the Troubled Asset Relief Program, reported this figure as well as a figure of only $23 billion in fresh capital for community banks to repay TARP or SBLF funds:
Industry experts say the amount of new capital needed by community banks nationwide is substantial. According to analysts with investment firms Raymond
James and Barack Ferrazzano Financial Institutions Group, and consulting firm
McGladrey & Pullen, LLP, it will take $23 billion in fresh capital for community banks to repay TARP or SBLF funds; to absorb credit losses and boost loan loss reserves; and to meet higher regulatory capital ratios. A higher estimate of $90 billion in community bank capital needs came from StoneCastle …show more content…
Citigroup’s recent proposal to buy back stock was rejected recently by the Federal Reserve, despite proposals from rivals J P Morgan Chase and Wells Fargo recently being accepted. Citigroup proposed a plan where the size of the buyback was based on a formula in which buybacks would be made over a two-year period if Citigroup hit certain targets11. The largest banks have indeed exited TARP 's Capital Purchase Program (CPP). However, as mentioned earlier, 351 regional and community banks remain in CPP. The Federal Reserve’s recent actions have allowed 137 banks to use The Small Business Lending Fund (SBLF) to refinance out of TARP 's Capital Purchase Program. The small-business lending program culled a large number of the more sustainable banks from TARP, while the remaining banks that have less capital, missed dividend payments or were subject to enforcement actions from their regulators must remain in