Small Community Banks and the TARP

Earlier this week, President George W. Bush made a formal request to Congress on behalf of President-elect Barack Obama for the release of the second $350 billion tranche from the $700 billion Troubled Asset Relief Program (TARP) fund. Though Congress passed the TARP rescue program back on October 3, 2008 to deal with the most serious financial crisis to impact the country since the 1930s, smaller community banks have had to wait to seek financial support until the government was able to draw up the rules under which they could apply, a delay that had caused unhappiness in the banking community and likely caused further turmoil on Main Street.

This past Wednesday, the Treasury Department finally released the rules that small banks will need to follow in order to seek support from the government's $700 billion financial rescue program. The Treasury Department gave the small banks until February 13, 2009 to submit their requests for money. The new rules cover approximately 2,500 banks that are organized as S corporations which do not pay any income taxes. Instead, an S corporation's income or losses are divided among and passed through to its shareholders. Most of them are set up as partnerships, with no more than 100 shareholders. Thus these small community banks aren't able to issue preferred shares to the government in exchange for capital injections from the TARP, as other publicly-traded banks can.

The nation's largest financial institutions, with publicly traded stock, began receiving billions of dollars in support in mid-October. But smaller institutions that do not have publicly traded stock had to wait until Treasury could come up with rules that would govern their applications.

The government earlier had established a December 8 deadline for about 3,800 banks that are classified as C corporations to apply for money. Both types of corporations are named for the part of the IRS tax code that applies to them.

The rules that will govern the applications from small S corporations will provide for government support in the form of loans rather than the purchase of preferred shares of stock. The debt will carry an interest rate of 7.7 percent until the fifth year of the government's investment when the rate will increase to 13.8 percent, according to the Treasury rules.

So far, Treasury has provided $192.3 billion to 257 large and small financial institutions in 42 states and Puerto Rico. Treasury officials say the goal is to provide banks with $250 billion of the first $350 billion in bailout money.

In the video above, the American News Project looks at one small bailed-out bank, Eagle Bank, a community bank headquartered in Bethesda, Maryland, which has received millions of dollars in TARP money but is having trouble making loans. Its CEO, Ronald D. Paul, says that the government has not taken fleeing depositors into account and, as a result, small banks and their surrounding communities will suffer.

Tags: Community Banks, S-Corporations, TARP (all tags)

Comments

3 Comments

Re: Small Community Banks and the TARP

S Corps? Are there banks THAT small? Or are they specially created to get TARP money?

by antiHyde 2009-01-17 03:31PM | 0 recs
Re: Small Community Banks and the TARP

Some 2,500 banks are S-corporations.

by Charles Lemos 2009-01-17 04:16PM | 0 recs
Re: Small Community Banks and the TARP

Dang! I gotta start up a bank!!  How do I do that?

by LordMike 2009-01-17 09:21PM | 0 recs

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