Articles
A Community Banking View of TARP: Paying for others’ sins
04.17.09
News about the toxic assets of large financial institutions, their desperate need for capital infusion and the subsequent passage by Congress of the Troubled Asset Relief Program (TARP) has dominated headlines for months. With the spotlight on how TARP is impacting large banks, little attention has been paid to how the program is affecting community banks. An interview with James Dunphy, president and CEO of Hampshire First Bank, headquartered in Manchester, NH, provides insight into the effects of TARP on community banks, and the individuals and small businesses they serve.
Is Hampshire First participating in TARP?
Hampshire First decided it is not the best course of action for us, as the cost of those funds and the potential changes that can be made in the unilateral provisions in the contract set up by Congress are too onerous.
Then why are some banks choosing to participate in TARP?
If a bank is in some distress and is low on capital, using TARP monies is a way for them to survive. For other banks that are strong but don’t have access to new capital because of the capital markets being frozen, it is a way to access the capital they need to grow.
How is TARP affecting banks that choose not to access these funds?
There is talk about assessing all banks throughout the country with a one-time special FDIC assessment to help pay for some of the mistakes that were made by some financial institutions. Banks such as Hampshire First and many others in New Hampshire didn’t get involved with toxic assets but will have to pay for some of those sins. In the banking sector, we also pay the FDIC an insurance assessment, which will increase significantly to pay for what others have done. But consumers will ultimately pay for this as the cost of financing will increase.
Is this fair to banks that have been prudent in their operations, or to their customers?
It’s not fair. Generally, I’m not a proponent of the TARP funds. There has been talk about a “too big to fail” doctrine relative to large financial institutions, but the market should have allowed some of these banks to work out their mistakes and pay the consequences, even if that meant failure. Anything that is considered too big to fail should be broken up. Otherwise, you create a moral hazard as there is no incentive to make the right decisions if their mistakes will be paid for and covered through programs such as TARP. It doesn’t feel fair to me that some of these folks who made bad business decisions are now having the government come in as their safety net. Anytime you have too much government involvement, it is not usually the most efficient way to run an institution.
How effective has TARP been?
Time will tell. In the beginning, we saw debates at the national level that even after a fair amount of funds were placed in institutions it wasn’t getting down to consumers. It will continue like any program, some folks will use it for the right and appropriate reasons and others will take advantage of it and will use it in ways to benefit themselves in ways not intended. As the funds have filtered out, it is starting to help on the consumer side, as funds did get to some regional and community banks. It will be some number of years though before we know if TARP was the right answer, but it doesn’t feel that way now.
What will be the ultimate cost for TARP?
I hope that the dollars spent on TARP aren’t too much and won’t create future problems in trying to pay back some of these monies spent to cure the problem now. We need to make sure that TARP funds being spent are truly going to have long-lasting benefits to the financial markets versus just fixing short-term mistakes. We have to be careful how much debt our government accumulates. Any time money gets borrowed or we incur leverage, and our government is doing similar things to what got the country into this financial mess, you want to make sure it has long-term benefits. If we’re spending this amount of money that we, our children and grandchildren are going to be paying for, let’s make sure we can still see some benefit from it 20 years from now.
How can consumers be protected from these financial industry mistakes in the future?
Many large financial institutions were focused solely on growing and created financial products that were only in their own best interest, even though these products didn’t make sense in the long run. And people who took on mortgages they couldn’t afford should have known better. Small community banks have a local view and don’t set people up to fail, like some institutions did, and community banks subsequently were not part of the toxic asset problem. Local community banks are also heavily regulated by the FDIC as an insuring agency of deposits, and in New Hampshire by the NH Banking Commission. Having a local regulatory authority that knows the market area and conducts a local review protects the local consumer. This is where the government can do the most good, at the local level.
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