WASHINGTON — The Treasury Department will provide more-favorable terms on government aid to small banks and credit unions serving low-income areas as part of the Obama administration's broader push to encourage lending, officials said Wednesday.
The Treasury is expanding a program announced in October to provide government capital to Community Development Financial Institutions, or CDFIs, smaller firms that focus on lending in low to moderate-income communities. Eligible banks will now be able to receive more capital from the government--up to 5% of risk-weighted assets, as opposed to 2%--and the Treasury will match private investments in firms in order to increase the number of firms that have access to the program.
Credit unions are also eligible to apply for funds up to 3.5% of their total assets, which officials said was equivalent to the 5% risk-weighted figure for banks.
"The basic pipes of the financial system--the credit pipes--are starting to open again," Treasury Secretary Timothy Geithner said. He called the government's plan a modest-sized program that can make a very big difference.
Administration officials said it was "essential to step in and provide capital" to increase lending to small businesses and other needs in low-income areas, and estimated as much as $1 billion could ultimately be provided to CDFIs through the program. Officials expect to release a term sheet by the end of the week, and applications could be accepted by the end of the month. Officials said there are currently more than 800 certified CDFIs.
The program changes are separate from a $30 billion small-business lending fund outlined by President Barack Obama on Tuesday. Officials said the changes to the CDFI program could be accomplished immediately, while the larger fund would require legislation to pass through Congress.
The CDFI program is aimed at addressing one of the key issues expressed by smaller banks: that the terms of the government capital are too onerous. Eligible firms would be able to receive funds with a 2% initial dividend rate, below the 5% rate offered under a previous Treasury program to inject money into the banking system, and would not have to issue warrants to receive funds.
Additionally, firms already involved in other Troubled Asset Relief Program initiatives will be able to effectively refinance under the new terms if they qualify as CDFIs.
A key change is allowing some more shaky firms access to the capital injections if they are able to obtain enough outside financing. The Treasury said it would match private investments for a total of up to 5% of risk-weighted assets if the injections would make the institution eligible for the program.