Small US banks say ‘No’ to Bailout

WHEN Smithtown Bancorp applied for money last year from the US Treasury’s $700-billion rescue programme, CEO Bradley E Rock figured the bank could use the cash to boost lending. Then politicians started pushing for conditions on the capital they were offering, and Rock decided the money wasn’t worth it. In late January he refused a $37.8-million investment from the government. “I would never agree to let Congress tell us which loans we should and shouldn’t make,” says Rock.

While many of the nation’s largest banks are asking for second helpings of aid, a growing number of small and regional banks are refusing the government’s help altogether. The concern among the healthy lenders is that regulators will dictate how they structure dividends, compensate managers, or make acquisitions. Worse, they worry that the government will impose lending quotas or force them to make loans that may not be in the banks’ best interests.

The fear is so pervasive that it could hamper the government’s ability to revive the economy. By injecting cash directly into banks, regulators are hoping to jumpstart the credit markets. But the government probably didn’t anticipate that some of the strongest lenders would take a pass. Meanwhile weaker banks, which need cash just to stay afloat, can’t afford to plough all of the fresh capital into loans.

The big banks have roughly $9 of capital for every $100 of assets, says researcher SNL Financial. Small and regional players have more than $13 in capital for every $100 in assets. With a better capital cushion and less exposure to risky debt, those banks can use the cash to bolster lending. “If we don’t fix Main Street banks, it ain’t gonna make a lot of difference on Wall Street,” says Walter G Moeling, a consultant at law firm Bryan Cave.

Ever since the rescue plan was announced back in the fall, investors have been thrashing the stocks of lenders that take aid. “There were a number of banks that were torn by whether to apply or not,” says New York Superintendent of Banks Richard H Neiman, one of the regulators overseeing the bailout programme. In all, more than 50 US banks have decided not to take money

Source: The Economic Times, Mumbai