Government Announces New Capital Program for Community Banks
By: KARLA L. REYERSON
October 27, 2009
On October 21, 2009, the White House announced a new initiative to provide capital to community banks in order to encourage small business lending. The program will be available to viable community banks with less than $1 billion in assets.
In order to receive capital under the program, the applicant will need to submit a plan explaining how the capital will allow the institution to increase lending to small businesses. Participants will also need to submit quarterly reports detailing their small business lending activities. Applicants will need to obtain the approval of their federal banking regulator in order to participate.
Participants will be eligible to receive new capital at an initial dividend rate of 3%, whereas participants in the Capital Purchase Program (CPP) pay a 5% dividend rate. The dividend will increase to 9% after five years. (The Treasury might establish higher dividend rates for S corporations, as they did with the CPP, in order to account for the different tax treatment they receive.) Participants will be eligible to receive capital totaling up to 2% of their risk-weighted assets.
The government has indicated that it will provide more specific terms and details for the new program in the coming weeks, which will include information regarding how it will treat CPP participants desiring to replace existing CPP capital with investments under the new program. We will provide updated information as additional terms become available.