On February 3, 2010, the Treasury Department announced enhancements to the TARP Capital Purchase Program for Community Development Financial Institutions (CDFIs).  In addition to significant improvements for CDFIs, for the first time the Treasury Department has formally announced that it will consider private matching investments to determine bank viability – which could be a significant signal of how the Treasury might treat community banks under the proposed $30 billion Small Business Lending Fund.

Basic Program Terms

  • CDFI’s can apply for capital equal to up to 5 percent of their total risk weighted assets.
  • The dividend rate on the preferred stock will be 2% for eight years (as opposed to 5% for five years under the original Capital Purchase Program) before increasing to 9%.
  • CDFI’s with existing TARP Capital Purchase Program investments will be eligible to transfer those investments into this program (effectively lowering the carrying costs of the capital and potentially providing additional capital, if desired).
  • Consistent with the previous terms for CDFI’s, CDFI’s will not be required to issue any warrants or other additional equity kickers to the Treasury Department under the program.

Matching Capital

As noted above, for the first time the Treasury Department has formally recognized the possibility of institutions raising matching private capital to become eligible for TARP capital.  Specifically, the new plan contemplates that if a CDFI might not otherwise be approved by its regulator, it will be eligible to participate “so long as it can raise enough private capital that – when matched with the Treasury capital up to 5 percent of risk-weighted assets – it can reach viability.”  The new private capital will have to be junior to the TARP investment (i.e. common stock or preferred stock with lower preferences – although potentially higher dividend rates – than the TARP preferred stock).

As an example, the Treasury Department notes that if an institution is deemed to need additional capital equal to 4% of its risk-weighted assets to reach the standard set by its regulator,  the Treasury would provide capital equal to 2% of its risk weighted assets if the CDFI can raise capital equal at least the same amount from private investors.  Presumably, if the CDFI raised the the requisite amount of capital privately, the CDFI would then be eligible for up to the full 5% of risk weighted assets under the TARP CDFI program.

As noted by the Treasury Department, this enhancement will allow the program to reach a broader range of institutions, and thus provide additional services to communities while protecting taxpayer interests.  Hopefully, this same concept will be present in the Small Business Lending Fund for community banks to support small businesses.