Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=104539
Story Retrieval Date: 5/19/2013 4:36:09 PM CST
The U.S. Treasury has dangled a carrot in front of banks and more in this area are ready to take a bite.
The banks are tapping into the U.S Treasury’s $250-billion Capital Purchase Program announced Oct. 14, a centerpiece of the $700-billion bailout authorized by Congress, which gives them capital by selling senior preferred shares to the government. While most banks remain in sound financial condition, many suffered third quarter loan losses and had to multiply their provision for future credit losses, so the Treasury’s offer may be too enticing to pass up. It's intended to stimulate lending, a counter to the current credit freeze.
Northern Trust Corp. in Chicago and Cincinnati-based Fifth Third Bancorp, which has a major presence in the Chicago area, promptly announced their participation in the program and will receive $1.5 billion and $3.45 billion respectively. Midwest Banc Holdings Inc. in Melrose Park, Ill., was approved for $85.5 million Thursday.
Taylor Capital Group Inc. in Rosemont, Ill., and First Busey Corp. in Urbana, Ill., have applied for funding, while Wintrust Financial Corp. in Lake Forest, Ill., PrivateBancorp Inc. in Chicago and Corus Bankshares Inc. in Chicago are considering a request, according to their recent earnings releases. MB Financial Inc., based in Chicago, is considering applying for the maximum it can qualify for, about $195 million, and may announce a decision on Friday. Rockford-based AMCORE Financial Inc. declined Thursday to state whether it will apply.
Nine of the largest financial institutions in the country are receiving a total of $125 billion, half the government infusion.
“Anyone who can get it is probably looking to get some, provided they don’t send bad signals,” said Raghuram G. Rajan, professor of finance at the University of Chicago Graduate School of Business. He said the pricing for the government deal is attractive, but banks may be concerned about convincing shareholders they are using the money for growth instead of just filling holes on the balance sheet.
Under the Treasury’s program, financial institutions can obtain funds equal to as much as 3 percent of their risk-weighted assets up to $25 billion. They must pay a cumulative dividend of 5 percent per year for the first five years and 9 percent thereafter. They also have to adopt the Treasury’s standards for executive compensation and corporate governance, which means not giving incentives to executives for taking excessive risks that would impair the institution and limiting “golden parachute” severance pay.
Some banks say the new capital would indeed enable them to expand lending, but others say they'd also use the money to acquire other banks and or just hold it to build a capital cushion for the coming year in anticipation of further loan losses.
In an October survey of bank lending practices by the Federal Reserve Board, a large percentage of domestic banks said they had tightened their lending standards and terms over the previous three months.
Not all banks are interested in the program. Robert Gecht, chief executive of privately-owned Albany Bank & Trust Co. in Chicago, said his bank is above well-capitalized levels and does not need the government’s support. He also does not consider the dividend required to pay the government as cheap and said he is concerned about issuing the required warrants to the government since it is difficult to determine exactly what his company would be giving up under them.
“The government is already a virtual partner in the banking business given the level of regulation in the industry,” he declared. “I am not interested in expanding that partnership any further.”
Chairman Richard Loundy of Devon Bank, in Chicago, said he's still gathering information about the offer, but he's not sure he likes the terms. He said the high dividend might trigger higher interest rates down the road for customers whose loans reset from time to time.
Taylor Capital Group plans to loan out all funds it receives, according to its earnings release. It has submitted an application for $105 million after reporting a third quarter loss of $80.5 million. First Busey would also use the capital for loan growth, in addition to offsetting potential loan losses, said David Mills, investor relations representative. It more than quadrupled its allowance for loan losses in the third quarter ended Sept. 30 to $8 million from $1.8 million in the year-earlier period.
Rajan of the University of Chicago said banks should not be expected to make more loans if the borrowers cannot pay them back in today's tightening economic conditions. “Making the same kind of loans that you made when everything was fine and dandy is a mistake,” he said. The issue of improving credit availability also depends on whether one judges banks receiving government funds by the amount of new loans issued or by less shrinkage of their loan portfolio, he said.
Wintrust CEO and President Edward J. Wehmer said if his company does apply for funds, they would be used primarily to expand lending and secondarily to take advantage of acquisition opportunities within its market area in the Chicago suburbs and extending to the Milwaukee area. The company lost $2.4 million in the third quarter ended Sept. 30 after increasing its provision for loan losses six-fold to $24.1 million from $4.4 million a year ago.
In October, National City Corp. in Cleveland was bought by PNC Financial Services Group Inc. in Pittsburgh after PNC received $7.7 billion in government money.
“It’s sort of unavoidable that they’re going to buy each other,” said Douglas W. Diamond, professor of finance at the University of Chicago Graduate School of Business. He said the consolidation of banks could lead to better-capitalized companies that are more willing to lend.
But Rajan added that bank buyouts would be good only if banks on the verge of failing are the ones targeted. If a bank takes over another bank that could have survived independently, it would essentially be a situation where the government controls who the winners and losers are, he said.
The Treasury has $250 billion set aside to buy senior preferred shares of banks as part of its $700 billion Troubled Assets Relief Program. All banks may apply for the program, but they must meet sound capital requirements to be considered. The application process involves consulting with the bank’s primary regulator and then submitting a two-page application.
With the deadline for applying to the program on Nov. 14, the undecided are now under pressure to determine whether the carrot is really worth it.