WASHINGTON — Broadening the government's rescue efforts to pump more capital into smaller institutions would expand lending and help the economy recover faster, industry representatives told Senate Banking's financial institutions subcommittee Wednesday.
Arthur Johnson, the chief executive of United Bank of Michigan in Grand Rapids, called for an expansion of the Treasury Department's Capital Purchase Program, in which the government took preferred stakes in banks, and a revival of the proposed Legacy Loans Program, which would have set up a fund to buy whole loans from banks and sell them to investors.
"Less than $3 billion is needed for all smaller banks to be well-capitalized," said Johnson, who was representing the American Bankers Association at the hearing. "The comparatively small sums of money that would be invested in these struggling but viable banks would pay big returns for the communities they serve."
Johnson said many community banks have had trouble gaining access to the capital program and that its eligibility requirements remain unclear. Meanwhile, a newer iteration of the CPP—the Capital Assistance Program — has not yet been implemented for community banks. "The changing nature of this program and the restrictive selection process has meant that banks that could have benefited from the program were unable to do so," Johnson said.
His testimony struck a chord with Sen. Michael Bennet, D-Colo., who was clearly skeptical of how well the government's program, broadly referred to as the Troubled Asset Relief Program, or Tarp, is being administered.
Jack Hopkins, the president and CEO of CorTrust National Bank Association in Sioux Falls, S.D., who testified on behalf of the Independent Community Bankers of America, said the government program is too arbitrary.
"Tarp has picked winners and losers," he said.
Picking up on the idea, Sen. Bob Corker, R-Tenn., said the Obama administration's plan to reform financial services oversight appeared to be "codifying Tarp so they can decide which banks will succeed and which banks will fail."
The administration's plan would create a regulator to oversee "systemic risk," which the witnesses endorsed. But the ABA said a systemic regulator should be given more authority over bank accounting rules.
"No systemic risk regulator can do its job if it cannot have some input into accounting standards — standards that have the potential to undermine any action taken by a systemic regulator," Johnson said in his written testimony. "Thus, a new system for the establishment of accounting rules — one that considers the real-world effects of accounting rules — needs to be created in recognition of the critical importance of accounting rules to systemic risk and economic activity."
Responding to a question from subcommittee Chairman Tim Johnson, D-S.D., the ABA and the ICBA witnesses disagreed over the Federal Deposit Insurance Corp.'s decision to base a special assessment on assets rather than deposits.
Hopkins praised the move and said it should become the norm, but the ABA's Johnson called the change "premature" and said it should be weighed as Congress decides how to cover the cost of a systemically important institution's failure.
Industry representatives said — and lawmakers agreed — that bankers are getting caught between public pressure to lend more and an examiner crackdown on risk-taking. "The regulators are clamping down and helping make this recession even more severe than it could have been," Corker told the witnesses.
Sen. John Tester, D-Mont., echoed the sentiment.
The ICBA said the government should jump-start the secondary market for loans backed by the Small Business Administration. A program to buy SBA-backed loan pools is stalled over hesitance by poolers to "turn over their customers to their direct competitors," Hopkins said.
"ICBA recommends either eliminating the primary dealer middlemen in the process or allowing the Federal Reserve Bank of New York to work as the intermediary with the existing SBA loan poolers," Hopkins said in his written testimony.