CAP Funds for Community Banks
Background
Following the distribution of Capital Purchase Program Funds in late 2008 and early 2009, many smaller community bank, were left out from participation. Industry representatives, including CBA began encouraging action within the Treasury, and started proposing different solutions.
In a letter to Treasury Secretary Geithner, dated Oct. 9th, CBA joined numerous other state associations encouraging Geithner to make up to $5 billion of TARP funds available for investment to interested community banks. Coupled with work from ABA including a letter, studies, and numerous meetings with regulators and officials at the Treasury, the Obama Administration released a proposal on Oct. 21st.
The Plan
The Obama Administration released a plan aimed to stimulate small business lending by making government investment capital available to smaller community banks. The plan, encouraged by CBA and other state banking associations in a letter dated Oct 9th, will make $5 billion in CAP funds available to interested banks under $1 billion in assets.
Funds would be available at a 3% annual dividend rate, which would jump to 9% after 5 years, and banks will be eligible to receive capital totaling up to 2% of risk-weighted assets. However, participating banks would have to submit a plan explaining how the capital will allow them to increase lending to small businesses; would be required to submit quarterly reports detailing their small business lending activities; and participation would still have to be approved by a regulator.
Within the same announcement, the Administration also called for legislation to increase the maximum loan size of SBA 7(a) loans from $2 million to $5 million; SBA 504 loans to $5.5 million; and SBA microloans to $50,000.
Moving Forward
According to the American Bankers Association, final details on the terms of the program, including the amount of capital available and how current CPP participants could replace existing capital with investments under this program, will be developed in the coming weeks by Treasury in consultation with community banks and small businesses.