Development Banks Seize Treasury Fund Opportunity

By Barba, Robert | American Banker, December 5, 2008 | Go to article overview

Development Banks Seize Treasury Fund Opportunity


Barba, Robert, American Banker


Byline: Robert Barba

Community development banks caught a break in the Treasury Department's rescue plan when they alone were exempted from issuing warrants to the government in exchange for capital injections, and they intend to take full advantage.

The cost of issuing warrants would have made participation in the Treasury's Capital Purchase Program nearly impossible for banks designed to serve residents and businesses in low-to-moderate-income areas, said Jeannine Jacokes, senior policy adviser to the Community Development Bankers Association.

With the warrant requirement removed, a "significant" number of eligible community development banks have submitted applications to receive government capital or intend to do so by Monday's application deadline.

"We are incredibly happy that Treasury recognized the role that ... [community development] banks can play in the economic recovery," she said.

Ms. Jacokes said she expects many of the banks to put the capital to work quickly, since the people and businesses that community development banks serve are "already living on the edge" in terms of savings.

"Given the current climate, the more capital they can get to lend in their communities, the better," Ms. Jacokes said. The banks "are certainly not going to be sitting on their money."

Other community development banks are also considering using the Treasury capital on acquisitions.

Dozens of banks and thrifts have won approval to receive Treasury funds, and it is believed hundreds more have applications pending.Publicly traded banks that participate in the program will issue to the Treasury a mix of preferred shares - paying a rate of 5% for the first three years, and 9% after that- and warrants for common stock.

The rules are different for privately held banks. Instead of taking warrants to purchase common stock, the Treasury would take warrants to purchase additional preferred stock. The warrants, which would be exercised immediately, would pay a 9% dividend.

The warrant requirement was likely eliminated for community development banks because when Congress passed the Emergency Economic Stabilization Act of 2008, the framework of the bailout, it instructed the Treasury to consider "providing financial assistance to financial institutions, including those serving low- and moderate-income populations and other underserved communities."

Community development banks differfrom traditional banks in that they have access to the Community Development Financial Institutions Fund, a Treasury division that provides financial assistance to institutions that work in underserved areas. In exchange for their outreach efforts in low- and moderate-income areas, community development banks can get direct investment from the fund and are eligible for tax credits.

About a third of thenation's roughly 60 community development banks are ineligible for the Treasury program because they are structured as Subchapter S corporations or as mutual thrifts. …

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