How are three local banks impacted by government bailout?

Talk about it

Local banks are feeling the discomfort of the economic downturn, but the pain is minimal when compared to the national scene. In reality, local banks have likely never been involved in a subprime loan and they are doing just fine.

So what impact does The Emergency Economic Stabilization Act of 2008 have on local banks? The law, commonly referred to as a bailout of the U.S. financial system, was enacted on Oct. 3. Among other things, the law authorizes the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation’s banks.

Of that amount, $225 billion has been made available to banks as money available for loans within the community.

As the law currently stands, most local banks will receive little impact from the new bill. There are rules tied to the bill that currently prohibit local, privately owned banks, from receiving the cash influx.

“Private, ‘sub S’ banks are not currently eligible for a capital injection,” said Gene Haberman of Citizens State Bank. Since most local banks are privately owned, they won’t be eligible for government cash. That could change, however.

“That rule is expected to change,” said John Malmberg of First American Bank. “The feds are telling us we can apply for capital and when the rule changes, we’ll be in the system.”

Associated Bank is one of a few Hudson banks that is publicly traded (shareholders) and is eligible for government money.

“Our bank is just fine and we don’t need to take any of the government funds,” Heiser said. “But, it does present an opportunity to get more money into the local community.”

Under the government program, the government would lend money to a bank and receive a portion of the bank’s stock — essentially becoming an owner of the bank. For any money the bank receives from the government, it must pay 5 percent interest for five years as it repays the government loan. After five years, if the government loan is not repaid yet, the rate increases to 9 percent.

One thing all three bankers agree upon is that the bailout rules are still a bit sketchy.

“It’s too early to tell if the bailout will be good or bad,” Heiser said. “On the surface it looks pretty good. But when the government gets involved and a new administration comes to Washington, however, you never know if the rules will change.”

Banks are allowed to receive up to 3 percent of their total assets. For instance, if a bank has $400 million in assets, it could receive about $12 million in government money.

Heiser, who served a three-year stint on the American Bankers Association Government Relations Committee, said a bank’s loan ratio is generally about 8:1. By that standard, the $12 million government loan could become about $100 million in available loan money in a community.

The bottom line is that local banks don’t need the loan, but may find it helpful as the government attempts to spur more lending.

The $225 billion made available in the program represents 3 percent of all bank assets nationwide. Therefore, it is likely that all banks — including the smaller privately owned banks — will eventually be included in the program.

As the law now stands, all major United States banks are required to accept the government funding. It is written that way so that some banks are not perceived as weak, or in need of government money. One of those forced to accept the funds, even though it is very strong, is Wells Fargo.

There are other impacts of the bailout bill that immediately affect all banks: