Small Banks, Counted on to Fuel Economy, Await Treasury Funds

By Rebecca Christie and Robert Schmidt
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Oct. 17 (Bloomberg) -- Community banks that Federal Reserve Chairman Ben S. Bernanke calls a key link between financial markets and the U.S. economy face a longer wait for government aid than their bigger competitors.

The Treasury is urging small and regional banks to contact their primary regulator for details on how to access $125 billion in funds -- half of a $250 billion sum set aside to recapitalize the nation's lenders. Five federal regulators plus the states, meanwhile, are waiting for more guidance from the Treasury.

``I don't think that when they rolled this out they understood there would be all these problems,'' said former Treasury official Wayne Abernathy, now an executive vice president at the American Bankers Association in Washington. ``The sooner they can get the details out, the better.''

Treasury Secretary Henry Paulson's aides are working to standardize procedures for putting capital into thousands of banks of varying size, charter and health. The voluntary program will serve as triage for the banking system -- giving some institutions a lifeline of money, while rebuffing weaker ones.

Smaller banks must decide by Nov. 14 whether they want to participate in the Treasury program, said Camden Fine, chief executive of the Independent Community Bankers of America, a Washington-based group that represents lenders such as CountryBank USA in Cando, North Dakota, and Easton Bank and Trust Co. in Easton, Maryland.

`Corporate Hoops'

``Many banks can't step through the corporate hoops,'' Fine said. The ``Treasury is willing to make some accommodation along that line, but we haven't heard definitively.''

Fine said he anticipates the department will release more details next week, which may help with the decision.

Some information about the plan is starting to emerge. The Treasury is making accommodations to allow privately held banks to participate and trying to find a way to help lenders that don't issue the kind of preferred shares that the U.S. wants to buy, Abernathy said.

The next step is out of banks' control, as the Treasury has to decide which applicants deserve the money.

``There's going to be a sorting process as to the financial health of banks and thrifts,'' said University of Connecticut law professor Patricia McCoy, a former member of the Fed's consumer advisory council. ``The ones that are either on the ropes or look like they might be on the ropes will not get capital infusions.''

Few Details Yet

Some community bankers said they don't have enough information yet to decide whether to participate.

Central Virginia Bank, a state bank that's part of the Fed system with about $500 million in assets, is in search of new capital to replace an $18 million investment in Fannie Mae and Freddie Mac preferred shares, said Larry Lyons, the bank's president and chief executive officer.

``We're very interested,'' said Lyons, whose bank is based in Powhatan, Virginia. ``We just have not had an opportunity to look at this thing in detail and look at what our other options are.''

For banks that intend to sign up, board approval will likely be required. For banks that are undecided, or those that don't normally issue the type of preferred stock the Treasury is buying, the administrative challenges are even greater.

``It is complicated,'' Fine said.

Paulson earlier this week set aside $125 billion for ``healthy'' banks of all sizes, after persuading nine major U.S. lenders to accept another $125 billion in fresh capital. The Treasury says the big banks will get their cash in ``days'' to start lending again.

The Other Half

Half of U.S. bank deposits are in those nine large banks, with the remainder spread across the country in smaller firms. Any delays by the Treasury in getting money to the local level threaten to slow economic growth in areas where job losses are mounting and consumer spending weakening.

Investors have responded optimistically to Paulson's bank rescue. Standard and Poor's Small-Cap Regional Banks Index of 37 small lenders rose 6.7 percent yesterday to 86.75 and is up 55 percent from a low this year reached on July 15.

Shares of KeyCorp, the third-largest bank in Ohio, are up 36 percent since Paulson announced plans to buy equity stakes in banks big and small. Regions Financial Corp., Alabama's biggest bank, is up 30 percent. Zions Bancorporation, a Salt Lake City- based lender operating in 10 western states, is up 27 percent.

Raising Capital

When Congress was considering the rescue program, the Treasury secretary said he opposed capital infusions into troubled banks because it amounted to a sign of failure.

With the credit crisis worsening and bank lending frozen, Paulson changed his approach.

``It's an absolutely horrendous time to go out to the market and raise capital,'' Lyons said. ``If things aren't too bad and too onerous in this Treasury proposal, we might consider doing that and then two or three years from now, we could go out and just raise capital in a normal fashion and pay that off.''

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net. Robert Schmidt in Washington at rschmidt5@bloomberg.net.