President Bush signed the Troubled Asset Relief Program into law on October 3, 2008. That marked the high point of this colossal flop. Community banks across the country, which had not contributed to the financial crisis in which they found themselves, showed faith in the federal government and signed up for the program. That's when the rules of the game started to change, the media labeled the program a bailout and the new administration began its campaign of vilifying everything they could include broadly under the word "bank." Bankers everywhere swore that they would never fall into such a trap again.
When Congress enacted the Small Business Jobs Act last fall, one of its major components was a $30 billion Small Business Lending Fund from which investments would be made in community banks to spur small business lending. The 5% rate of interest to be earned by the U.S. Treasury on those investments would decrease by 1% for each increase of 2.5% in their small business lending, down to a possible rate of 1%. Sounded good, but bankers were skeptical. Though it took Treasury a while to come out with the details, the program seemed to have a great deal of merit, both for community banks and for the businesses in the communities they serve. The mistakes of the Tarp program would be avoided, Treasury assured everyone. The economy would get a needed kick in the pants. Jobs would be created. Banks with a composite Camels rating of 3 would be able to participate. Though it never reached the levels Congress had envisioned, bankers from the around the country signed up for the SBLF program. The last figures we saw showed North Carolina banks signing up at about four times the national average.
Hold the phone! Last week, those banks in North Carolina which had applied for participation in the SBLF were sent a three question e-mail from Treasury inquiring about their ability to make dividend payments on SBLF investments. A good percentage of community banks with a Camels rating of 3 are operating under Memoranda of Understanding. In our industry, MOUs are as common today as parrots in the rain forest. In virtually every one of those cases, the memorandum limits payment of dividends until it is lifted. We understand that this situation applies to approximately one-half of the banks that have applied to participate in SBLF, nationwide. Although many North Carolina banks have returned to profitability over the past few quarters, and expect to stay there for the remainder of the year, they have to apply to their federal regulator, most often the FDIC, for permission to pay any dividends each quarter. In many cases, it has proven to be a struggle for banks to even gain permission to make Capital Purchase Program payments under Tarp
According to the staff member of the North Carolina Office of the Commissioner of Banks most closely involved with this issue, it appears that any bank with any dividend restriction would be very unlikely to be funded by the SBLF program. That office has concluded that the Treasury is going to be very strict about this issue and that even if the bank has been able to pay dividends with approval in the recent past, that does not change their position that the restriction must be lifted in order to be funded. While banks are free to ask their federal regulators for relief from a dividend restriction, indications are that such permission will seldom be granted.
So, SBLF will not provide the boost to economic activity hoped for when it was enacted. Banks have again had the rug pulled out from under them. It's truly a shame because this concept could have provided important benefits to every imaginable constituency. Maybe if Treasury had just a little more banking experience in its ranks....
Thad Woodard is the president and chief executive of the North Carolina Bankers Association.