Banks in the metropolitan region are using initial federal bailout funds to build up their capital base and expand their institutions, according to participating bankers. Yet there are few signs that Treasury Department officials”™ stated goal of reopening frozen credit markets for businesses and other borrowers with the capital infusions to private lenders has been realized, according to banking experts.
Countering common perception, one economist representing a national small-business group last week called the credit crunch on Main Street “a myth” and said the federal bailout of large banks and Wall Street investment firms has little impact on small businesses.
As of Dec. 9, the U.S. Treasury Department had completed approximately $165.3 billion in payments to 88 financial institutions through its capital purchase program, part of the $700 billion authorized by Congress this fall under the Emergency Economic Stabilization Act. The government”™s stock purchases range from $25 billion ”“ at Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. ”“ to $1.7 million at Manhattan Bancorp in El Segundo, Calif.
In New York City, officials at seven-year-old Signature Bank expect to close this month on a $120 million stock sale to the Treasury Department through the capital purchase program. The full-service commercial bank operates two private-client offices in Westchester County, in White Plains and New Rochelle.
Signature Bank President and CEO Joseph J. DePaolo said the bank was invited by its Federal Deposit Insurance Corp. regulator to participate in the Treasury program. In September, Signature netted $148 million in a stock offering and ended the month with a total risk-based capital ratio of 16.11 percent, compared to the 10 percent regulatory requirement for well-capitalized banks. The federal money will raise Signature”™s capital ratio to more than 19 percent. A $5.8 billion bank at the end of 2007, Signature will be a $7 billion bank by the end of this year, DePaolo said. Â
“We want to use it to continue to grow the institution. We felt that in these tumultuous times, the best thing you can do is to get as much capital as you can get,” said DePaolo, a Larchmont Woods resident and Iona College graduate.
“Our philosophy has always been that you build the bank for the depositors. If you want to keep depositors comfortable, you have to keep you capital much higher than you”™re required to be well-capitalized.
“Our capital is going to be literally touching the sky. But we feel comfortable having that capital because we are competing against all these trillion-dollar institutions and we think it”™s necessary.”
At KeyCorp, the Cleveland, Ohio-based bank that last month received $2.5 billion from the Treasury program, the capital “can build confidence with our clients and confidence in Key that their money is safe with us,” said Michael Orsino, president of Key Bank”™s Hudson Valley/Metro New York district. “From our perspective, we want to support and grow our existing client relationships” by using the added capital in lending to them.
With the stronger capital base, Orsino said Key Bank eventually will consider more acquisitions like its deal for Union State Bank in January “to fill in the community bank franchise” as opportunities arise.Â
Richard E. Ottoo, assistant professor of finance at Pace University”™s Lubin School of Business, last week said banks generally are using the federal capital to build up their weakened capital foundations rather than make the money available for lending.
“My feeling is that the banks will not end up utilizing this bailout to the extent that it was intended” to restore liquidity. “I am very, very doubtful that the banks will transmit this government funding to the very dire needs of the credit market dollar for dollar,” Ottoo said.
At this first stage in the bailout program, the trend among participating institutions is “very, very limited loans to blue-chip companies. For most of the small businesses, I think that the majority have not been able to get credit.”
For bailed-out banks reluctant to extent credit, “I think most of them still don”™t know the extent of the troubled assets within the bank,” the professor said. “Even the government may not understand fully. The funding from the government is certainly not enough for their operations.
“The banks are also worried that they themselves cannot access very low interest rates in the money market and they would want to continue to build up their capital. They”™re using that money to build up their capital. That is why some of them accepted the government more or less taking an equity position.”
Ottoo said he thought that early next year, banks will begin lending some of their added capital to businesses. “I”™m hopeful that things will start to turn around,” he said. “It may not be that fast, but banks know it”™s in their self-interest to support business clients as well as consumers.” Â
William C. Dunkelberg, chief economist for the National Federation of Independent Business, representing about 500,000 small businesses, said only 3 percent of members in a recent survey considered access to credit their biggest problem in doing business. That percentage has not changed since 1983, he said. Weak sales led the list of woes for business owners, followed by taxes and inflation. Â
Dunkelberg, a professor of economics and former business school dean at Temple University in Philadelphia and board chairman at Liberty Bell Bank in southern New Jersey, said 11 percent of members surveyed this month said they had trouble getting credit, compared to 3 percent in 2003 and 12 percent in the economic recession in 1991.
“Credit always gets a little harder to get cyclically,” Dunkelberg said. “We saw absolutely nothing that looked like a freezing up of credit. There was no credit crunch on Main Street. That was a myth.”
Regarding the federal bailout program, “I don”™t think it”™s really changed things very much,” Dunkelberg said. The big banks that have benefited most from the program for the most part did not finance small businesses previously.
For those large banks, “Apparently getting the federal money is not helping enough. They”™re still competing for savings deposits very aggressively” with small banks such as Liberty Bell.
“Main Street is not Wall Street,” Dunkelberg said. “Wall Street has an impact on Main Street, but in terms of credit ability, things have not changed here.”