How are three local banks impacted by government bailout?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.
By: Doug Stohlberg, Hudson Star-Observer
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:
“Of course, this service is not free,” Malmberg noted. “Each bank pays for the insurance, and that rate will increase to cover the increase in insurance.”
As part of the package, the FDIC is offering unlimited coverage for corporate checking accounts.
The FDIC insurance increase is temporary, set to expire Dec. 31, 2009.
“We have heard very little about that aspect,” Haberman said. “But that would be a popular item for banks with bad loans.
Heiser said, however, that the government has done some re-thinking about that clause.
“I think the latest idea is that the money for bad loans would go directly to the banks and let them work out the problems,” Heiser said. “They know their customers better than the federal government. If the feds take over the bad loans they would be in a tough bargaining position.”
The vast majority of the nation’s 6,000 banks are healthy.
“There is a difference between most banks and those on Wall Street,” Heiser said. “The Wall Street banks were running amok. They are not FDIC insured and really got caught up in the subprime, arm loan culture. Unfortunately, all banks get painted with a broad brush. Customers may now realize that the ‘hometown’ bank may be the best.”
The local bankers agreed that it was critical that the government bailed out Fannie Mae and Freddie Mac.
The agencies provide a secondary market in home mortgages, purchasing mortgages from the lenders who originate them. They hold some of these mortgages, and some are “securitized” — sold in the form of securities which the government guarantees.
“The government had to bail them out,” Heiser said. “If the government had not backed up Fannie Mae and Freddie Mac, government guarantees would mean nothing.”
Even though the local banks are still strong, they have also seen bumps in the road.
“St. Croix County is one of the fastest growing counties in the state, so most of our banks have been lending money to developers and builders,” Haberman said. “But we’re doing fine and not seeing any major high levels of delinquencies. We’re actually beginning to see the lending channels begin to thaw.
“Our part of the country is doing better than most. We have a pretty diversified economy in Hudson and St. Croix County.”
Malmberg said that many local businesses are not doing as well as last year, but he too sees signs of things starting to improve.
“We have a pretty dynamic local economy,” Malmberg said. “We’re starting to see more economic activity.”