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11+ Years of TARP

11+ Years of TARP

November 6, 2019

Authored by: Robert Klingler

As I have repeatedly written on this site, without regard to other benefits associated with the Troubled Asset Relief Program (such as avoiding a further collapse of the global financial system), the TARP program, and particularly the Capital Purchase Program, was profitable for the U.S. Taxpayer. As a banking lawyer and son and grandson of community bank presidents, I’ll concede that I’m biased. But the numbers speak for themselves.

Even ProPublica acknowledges that TARP was profitable.

Overall, the TARP remains in the black, though just barely.

What does ProPublica means by “barely” profitable? Apparently, “a narrow profit of about $1 billion.”

I hate it when I only have a billion dollars in profit. That’s $1,000,000,000.00 to put it in context.

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Is the OCC on a Path to Greater Power?

bankthinkIn a recent American Banker BankThink article, Partner Dan Wheeler explores the possibility that the OCC could rise in stature, while the other banking regulatory agencies fall out of favor.  By largely staying out of Congress’ scrutiny and taking a lead on fintech regulation, Dan argues that the OCC is well positioned to obtain greater chartering and regulatory responsibility under a Trump administration.

Some regulatory agencies, such as the Consumer Financial Protection Bureau and Federal Reserve Board, appear ripe for more congressional criticism and even curbs to their authority under the incoming Trump administration. But one may be in relatively good position to have its authority expanded: the Office of the Comptroller of the Currency.

The OCC has stayed under the radar and avoided the political backlash aimed at other regulators while also emerging as a new leader in the fast-growing area of fintech regulation. The OCC’s focus on innovation and its largely pristine image among lawmakers could lead to greater chartering authority and — if the CFPB continues to lose favor — more responsibility to oversee consumer rules.

Continue Reading Dan’s position, OCC Could Gain Power as Other Agencies Fall Out of Favor, on AmericanBanker.com.

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CFPB Denied

CFPB Denied

November 11, 2015

Authored by: Robert Klingler

Invoking memories of Apple’s famed 1984 Superbowl commercial, a group called the American Action Network aired an anti-CFPB spot during last night’s Republican presidential debate. If nothing else, the spot should encourage further discussion of the role and impact of the Consumer Financial Protection Bureau.

The spot certainly portrays the CFPB in an evil light that is sure to please many in the banking industry, but its broader impact is less certain. A well-written piece by the American Banker offers several reasons why the ad could backfire, not the least of which is the hyperbolic nature of (and shortcuts taken by) the spot.

And former FDIC Chair Sheila Bair seems to agree.

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Extending Credit to a Bank Holding Company

Over the past several years reports of someone extending credit to a community bank holding company were similar to sightings of the Yeti in the Himalaya, you might hear about it but you never actually saw one. The number of bank failures and the consequent insolvency of many bank holding companies has led to a natural reluctance on the part of many lenders to provide such financing. The losses that many lenders suffered on such loans has raised some interesting questions about the loans were structured to begin with. The typical loan documentation for such a credit usually has traditionally had only a few financial covenants. The obligation to maintain well capitalized status for both the bank holding company and the subsidiary bank has been the primary focus on the assumption (not altogether incorrect) that maintaining a strong capital base cures many sins. Other covenants might address the ratio of non-performing loans to total capital, the ratio of the Allowance for Loan and Lease Losses to classified assets or simply the bank’s Texas ratio.

Historically, banks generally use financial covenants in loan documents as a signal to either cause the borrower to take immediate action to right the ship or to allow the lender to exit the relationship.  In theory, the “early signal” approach works in many types of businesses and industries. It has proven, however, to be problematic in the banking industry. The issue that lenders have run into is that a loan to a bank holding company is unlike any other type of loan they might make. In a nonbanking environment the lender might seek to take control of the assets and liquidate them.  At the end of the day the lender is free to liquidate assets and apply the proceeds toward the loan within a broad framework provides by general contract law and the UCC. A loan secured by a controlling interest in a bank presents a different situation.

When the subsidiary bank gets into financial distress the lender to the bank holding company can be presented with a difficult dilemma. During this past recession, it was not unusual to see banks downgraded from 2 to 5 on the CAMELS ratings in one examination cycle and to fall from being well capitalized very quickly. Thus, the early warning nature of the traditional financial covenants were of almost no assistance whatsoever to the lender. Once the subsidiary bank was considered “troubled” and prevented from making dividend payments to the holding companies, bank holding company loans quickly moved into default and in many cases had to be written off completely. Another particularly damaging element was the use by banks of  interest reserves for loans in the ADC portfolio. Interest reserves served to mask a decline in the quality of the underlying loans in that a loan may show as current on the bank’s books while in reality the real estate project has stalled.

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Commentary: The End of Community Banking?

On June 29, 2010, Sarah Wallace,  chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio, authored a passionate opinion piece in the Wall Street Journal titled “The End of Community Banking.”  While I agree with many of Ms. Wallace’s points, I do NOT see the end of community banking in the foreseeable future.

I do think that we are going to see tighter regulations and tighter credit than we saw in the five years before the financial meltdown – 2002 through 2007.  Those five years were the culmination of a world wide expansion of credit and leverage that began in the US around 1980, so we really had a great run.  Nonetheless, by 2002, a good number of observers would argue that credit availability was running somewhat out of control.

As Mrs. Wallace suggests, we will have tighter rules, but they will by nowhere near as tight as those that prevailed until the late 1980’s or early 1990’s.  During my career beginning in the late 1960’s, we have done away with limits on interest paid on deposits, most commercial usury limits, limits on branching and cross state expansion, certain caps on real estate lending, and we have expanded the lending limit in many cases from 10% of capital to 25%.  Most of these changes will not be reversed, and credit will continue to be available for borrowers who can demonstrate an ability to repay the loan.  However, I do not see banks going to the credit excesses of the 2002-2007 period, and there will be  people who might have gotten loans then who will not be able to get loans in 2011… and that is probably not all bad.

Wallace is chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio.Wallace is chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio.
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Miscellaneous TARP Stories

Miscellaneous TARP Stories

January 26, 2010

Authored by: Robert Klingler

We’ve identified a number of stories that or posts that never quite made it into individual BankBryanCave.com posts.  Rather than continuing to hold on to them, I’ve assembled them here.

The Simpsons

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Boards and Strategic Planning in a Challenging Environment

Short-Term Planning for Recovery and Survival

(This post was authored by Walt Moeling and Dustin Hall.  A version of this post originally appeared in the August 2009 issue of the ABA’s Community Banker magazine.)

The grim economic prognoses we continue to hear about have an immediate impact in the bank board room. Boards must think about short-term planning for recovery and survival because virtually no bank is wholly immune from the current recession.  Although the problems may have started with residential real estate in the Sunbelt, they have gone much beyond that now, impacting banks throughout the country.

As a director you must plan for both long-term and short-term.  Long-term planning is tremendously important, and we hope to make it to the “long-term,” but short-term planning is critical today.

Short-term planning in this context deals with the reality of today’s marketplace.  The focus is not on earnings or even stock value, two traditional focal points for planning.  Instead, the focus is on capital management, liquidity, and asset quality.

Capital Management

Your short-term capital planning in the face of mounting losses cannot focus on today or yesterday; it must focus on tomorrow.  You must ask: Where are we going?  What will happen if housing prices drop for another two and a half years, as predicted by some?  Can our borrowers sustain a more prolonged recession?  If not, where will our capital be three, six, and nine months from now?  In essence, you must stress test your bank to see how far it can go.

A real problem for directors is assuming that capital today is as readily available as it has been for the past 15 years, or that they can sell the bank if there is a real problem.  Unfortunately, there is no public market, and virtually no private equity, for bank stock.  Those sources are presently closed, shall we say, for repair.  Instead, short-term capital is likely to be found only within the boardroom and from family and friends.

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Commentary: NYTimes Recognizes Community Banks

The front cover of the May 17, 2009 issue of the New York Times Magazine asked “Are Small Banks the Future?”  As noted in the article, lending may have slowed at the largest banks, but at the other end of the financial system, there are 8,500 community banks, and most remain very strong.

In the midst of the worst banking crisis since the Great Depression, community banks have generally fared well. That’s because they typically shunned the lending practices that led to high default rates. They rarely participated in the securitization of loans, credit-default swaps and other overvalued financial products that put the global financial system in crisis. Instead, they stuck to the fundamentals. They considered the character and history of their borrowers. They required collateral. Without community banks, the current financial crisis would be a lot worse.

The focus of the mainstreet press, and the Treasury Department, continues to be on the largest institutions, whether it be the initial nine TARP Capital recipients, or the nineteen that underwent the stress test.  There is some rationality for this focus, the majority of assets, deposits and loans are held by these institutions.  But just like small businesses generally, community banks play a critical role in the American economy.

Community banks may have weathered the current crisis better than larger banks, but they remain an American oddity. Most other countries have 5 or 10 na­tional banks, and when they get in trouble, as they did in Iceland, it can be devastating. The balance in this country is tipped toward big institutions (the four largest control half the assets held by American banks and 40 percent of all deposits), but community banks still make 43 percent of all small business loans under $1 million. Since January 2008, fewer than 1 percent of all community banks have failed.

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Commentary: Demonstrating a Bank is Using TARP Capital to Lend

One issue that seems to be gaining traction is the need for banks to show how they are using TARP Capital, with a strong preference for the banks to be using TARP Capital to make loans.  While the fungibility of bank capital makes it virtually impossible to directly tie any particular dollar of capital with any particular dollar lent, that fungibility also gives great leeway to community banks to demonstrate the lending impact of TARP Capital.  Despite the political hot potato, we expect very few, if any, community banks to be criticized for their use of TARP Capital funds.

We do not believe that TARP Capital should fundamentally change the way in which bankers run their banks.  Solely because they have TARP Capital, banks should not approve loans that they otherwise would turn down.  However, any bank with additional capital, which TARP Capital provides, is in a better position to make or renew loans than that same bank would have been without TARP Capital.

A bank should be able to show that TARP Capital is “working” so long as its total loans are higher than they would have been without the TARP Capital infusion.  In recognition of the current economic environment and capital restraints, we believe many banks would be actively attempting to shrink the size of the bank were they not to receive TARP Capital infusions.  As a result, merely maintaining the current levels of loans could, in reality, be the result of TARP Capital increasing bank lending activity.  Even Barney Frank’s proposed reform legislation acknowledges that TARP Capital may simply minimize the decline in lending that normally accompanies economic recessions.  While this metric may be difficult for the Congressional Oversight Committee to accept, anytime the question is asked whether a new program is working, you have to make assumptions about what the situation would look like without the program.

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Commentary: Big Picture Thoughts on Applying for TARP Capital

Whether to apply for or accept TARP Capital is a decision that each bank needs to make individually depending on its own markets and circumstances.  However, as explained below, we believe each bank needs to prepare a realistic, worst-case scenario for the next three years.  Unless your bank’s capital will remain strong, we think you should apply for TARP Capital.

In three years, your bank will likely be in position to redeem the TARP Capital.  If that’s true, then the TARP Capital will have served as an inexpensive insurance policy that went unused, and you won’t be subject to any further government restrictions.

On the other hand, it is possible that, in three years, the financial condition of your bank makes you unable to redeem the TARP Capital.  In that event, it is very clear that you needed the TARP Capital.

With only these two scenarios, we believe almost every bank is better off applying for TARP Capital.

Where is the Economy Headed?

As the residential real estate market declined, all the contractors and subcontractors associated with that market began to suffer.  These contractors and subcontractors include our drywall installers, plumbers, painters, flooring specialists, lighting specialists, landscapers, pavers, pool installers, and numerous others – a vast group of construction and service-industry workers.  With new residential starts drying up, and with in-progress projects shutting down, many of the employees in those contracting and subcontracting fields began to lose their jobs.

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