VideoEvery spring, the thawing of the Yellow River threatens lives and property across Inner Mongolia. Ice blocks break free and then pile up further downstream, causing floods and dam bursts. The Chinese army often has to shoot cannonballs at the ice to restore the river's normal flow.
Governments around the world have taken a similar approach to freeing up the frozen banking system: blast away at blockages in liquidity so that banks can resume channeling funds to businesses. But it looks to be a long winter, as many lenders simply aren't ready — or willing — to see their capital dislodged. As much as they may profess to care about corporate customers, commercial banks have made their own survival priority number one.
"A couple of years ago, banking was all about leveraging capital and growing [earnings per share]," says Michael Reinhard, CFO of National Penn Bancshares, a Pennsylvania-based community bank with $9 billion (€7 billion) in assets. "Now it's about generating capital and preserving it."
What do banks have to do before they feel comfortable making loans again? Plenty. For one thing, raising capital is still a struggle, despite the bailout largesse. Also, risk management, both credit and otherwise, has to be retooled, especially with regulators, shareholders and lawyers breathing down bankers' necks. Then there is the problem of disclosure: almost everyone is clamoring for banks to come clean about the quality of their balance sheets, many of which — particularly in the US and the UK — are still riddled with toxic mortgage-related assets.
But the first order of business for banks is shoring up capital. Officials on both sides of the Atlantic contend that banks infused with government funds will have no choice but to lend the bailout funds or use them to absorb loan write-downs and restructurings.
By far the largest bailout, the US government's Troubled Asset Relief Program (TARP), which evolved into the Capital Purchase Program (CPP) for injecting preferred capital into healthy financial institutions, had released $194 billion to 317 financial institutions by late January. In return for taxpayers' money, the government took preferred shares that pay a 5% dividend, which rises to 9% after five years. "If a bank doesn't put the new capital to work earning a profit or reducing a loss, its returns for its shareholders will suffer," said the US Treasury's interim assistant secretary for financial stability and TARP overseer Neel Kashkari in January.
Have programmes such as TARP freed up the flow of funds? At some banks, yes. For example, Independent Bank of Michigan, with $3 billion in assets, wrote $72.4m in new lending — equal to the total amount it received from TARP — during the one month it had the funds in its possession, says CFO Robert Shuster. National Penn Bancshares, which received $150m from TARP, has written several loans, including two totalling $19m — one to an outpatient medical facility whose lender wanted to exit the relationship and one to a retailer to finance holiday season inventory. "We don't usually get involved in large business loans, but TARP made it a whole lot easier," says CFO Reinhard.
Overall, however, only a fraction of the funding has made it from banks' vaults to companies' coffers, despite some banks sitting on the capital since last October. Commercial and industrial loans on the books of US banks dropped by $358 billion from November 2008 to mid-January, according to the Federal Reserve. And research by The Financial Times in February found that only about £12m (€13.4m) has been lent to companies under the UK government's £1 billion loan guarantee programme for small businesses. (The bailout package for UK banks, including RBS, Lloyds TSB and HBOS, has thus far totaled £37 billion.)
Clearly, some larger banks are hoarding capital, but is it fair to tar all the institutions with the same feather? Many continental European banks certainly don't believe so. "Is there an assumption that we are not lending any more?" asks Bertrand Badré, CFO of Crédit Agricole, France's largest bank, which raised €3 billion last year by issuing hybrid securities that were bought by the French government, under the first of its two €10.5 billion rescue plans. (The loans to the country's six biggest financial institutions carry a hefty 8% interest.) While Badré concedes that French banks are less capitalised than they were, say, 18 months ago, their situation isn't comparable to their counterparts in the US and the UK. "Growth in credit in France is more than 7% year on year on average, compared with less than 6% in the rest of Europe."
Uncharted Territory
Badré is among the bank CFOs who believe the bailout programmes have been unjustly criticised. "It is very difficult to judge the various programmes that were initially announced," he says. "At that time you had no markets were lending anywhere in the world and measures were needed to ensure sufficient capital to run the economy. That was the rationale."
Patrick Butler, CFO of Raiffeisen Zentralbank (RZB), a privately held Austrian institution that's 88% owned by eight of the country's landesbanks, also goes easy on governments and policy makers. "We — and that includes market participants, regulators, governments, indeed everybody who has some responsibility to carry out the world's financial system — are now operating in uncharted territory," he says. "We don't have a script for what is occurring. So it's not surprising that there have been some policy proposals and actions that have not been optimal, either in the way that they've been announced or in the way that they've been executed."
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