U.S. Banks Shun Rollovers as $231 Billion of FDIC Emergency Loans Come Due

By James Sterngold - Oct 14, 2011 11:56 PM GMT+0700

Bank of America Corp. (BAC) and Citigroup Inc. (C) are among firms planning to repay rather than roll over their share of $231 billion raised under a U.S. loan program meant to help the economy as the business slowdown crimps demand for credit.

Lenders including General Electric Co. (GE) and JPMorgan Chase & Co. (JPM) face deadlines to refinance or repay by the end of 2012, when funds borrowed under the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program mature. The emergency program provided U.S. guarantees to help banks raise money after credit markets froze in the 2008 financial crisis.

While lawmakers are urging lenders to help create jobs, loan demand is slack and bulging deposits mean banks don’t need to hang on to cash received when they sold the U.S.-backed debt. Total loans and leases dropped 8.6 percent at midyear from 2008’s second quarter to $7.31 trillion, according to FDIC data. At the same time, regulators are trying to avert future shocks by pushing banks to reduce risk and build capital.

“Washington is engaged in a tug-of-war, and the regulators are winning,” said Ashish Shah, co-head of global credit investments at AllianceBernstein LP. “Politicians say banks need to lend, and the regulators are essentially encouraging the banks to shrink.”

The biggest user of the guarantees is General Electric Capital Corp., the finance arm of Fairfield, Connecticut-based GE, with $45 billion outstanding according to the FDIC. New York-based Citigroup is second with $44 billion.

Payment Plans

Spokesmen for Bank of America and Citigroup, ranked first and third by assets among U.S. lenders, said their firms are planning to pay down rather than refinance TLGP loans as they come due. At GE, “we will meet our maturity obligations through a combination of new debt issuance and right-sizing the balance sheet per our plan to shrink GE Capital,” said spokesman Russell Wilkerson. GE will have to use conventional debt sales to refinance since the TLGP isn’t providing new guarantees.

The program permitted firms to raise money during the financial crisis by selling debt securities guaranteed by the FDIC. This allowed banks to borrow at close to the same interest rates as the U.S. Treasury. At the peak, lenders issued almost $350 billion of U.S.-backed debt, according to the FDIC. Regulators said the goal was to pump money into banks and boost the overall economy.

“We want you to use it,” Sheila Bair, then the FDIC’s chairman, told bankers on a conference call on Oct. 16, 2008. “We want to normalize lending activity again. We want to unlock the interbank markets and get that money going out to your customers, to your consumers and to your business borrowers.”

Loans and Deposits

Loan balances didn’t increase until the middle of this year, when they rose less than 1 percent, according to the FDIC’s quarterly banking profile. Deposits advanced 1.7 percent, with most of the recent inflows invested at Federal Reserve Banks, the agency said.

“The volume of activity has been impacted by weak demand and in some cases a hesitancy to take on risk given poor market conditions,” said Andrew Gray, an FDIC spokesman. While the program succeeded in easing the financial crisis and most banks are very liquid, Gray said, “lending activity still has a long way to go before it approaches normal levels.”

“There really were two objectives, to stabilize the financial system and, over time, get the economy growing,” said Pri de Silva, an analyst with New York-based CreditSights Inc. who expects most of the securities to be paid down. “They achieved the first, but I don’t think the growth part happened.”

Bank of America

Bank of America had $27.5 billion of the guaranteed debt outstanding, according to the company. Total loans to customers fell to $941.3 billion as of the second quarter from $976 billion in the first quarter of last year. The bank is cutting back on risk and plans to repay TLGP debts as they come due out of its cash and other resources, said Jerry Dubrowski, a spokesman for the Charlotte, North Carolina-based firm.

“We have been reducing our risk-weighted assets significantly,” Dubrowski said. “We’re streamlining and simplifying and building a smaller balance sheet.”

Citigroup said it had $51 billion of TLGP debt as of midyear, and the sum has since declined to $44 billion, according to the FDIC.

“Citi does not expect to replace maturing TLGP debt,” said Jon Diat, a spokesman for Citigroup. The bank has $462 billion in cash and securities it can use to repay the debt, Diat said. Loans dropped to $688.2 billion at the end of the second quarter from $729 billion a year earlier.

Citigroup and JPMorgan

“We have made enormous progress refocusing our business strategy to take advantage of our global network and reducing Citi Holdings assets by more than $500 billion from peak levels,” said Diat, referring to the “bad bank” created in 2009 to hold troubled assets.

JPMorgan, ranked second by assets, has about $31 billion outstanding under the guarantee program, according to Howard Opinsky, a spokesman. The New York-based company isn’t releasing details on its repayment plans, he said. The lender’s total loans rose less than 1 percent in the third quarter from the year earlier to $697 billion. That was down from $744.9 billion at the end of 2008.

Morgan Stanley (MS) has $18.3 billion outstanding, according to Bloomberg data, while rival Goldman Sachs Group Inc. (GS) reported $17.1 billion at the end of the second quarter. Spokesmen for both New York-based firms declined to comment. San Francisco- based Wells Fargo & Co. (WFC), the biggest U.S. home lender, has $9.5 billion outstanding, said Ancel Martinez, a company spokesman, who declined to comment on repayment plans.

Liquidity is no longer an issue and bankers could raise the $231 billion quickly if they wanted, according to Tom Farina, a managing director at Deutsche Insurance Asset Management in New York, which oversees more than $200 billion. There’s no apparent strain because banks have been hoarding cash rather than lending aggressively, Farina said.

“The real issue is that the banks are trying to get smaller,” he said.

To contact the reporter on this story: James Sterngold in New York at jsterngold2@bloomberg.net

To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.