UPDATE 2-New US bank plan offers lending incentive -Geithner

* Banks get incentive to lend under Obama’s loan fund plan

* Cost of government capital falls as lending increases

* Program totally separate from TARP to avoid stigma
(Adds details on conversion of existing TARP funds)

By David Lawder

WASHINGTON, Feb 2 (BestGrowthStock) – The Obama administration’s new
plan to revive small business lending would reduce the cost of
government capital for small banks as they make more loans,
U.S. Treasury Secretary Timothy Geithner said on Tuesday.

“We’re trying to create strong positive incentives to lend
in support of growing businesses,” Geithner told reporters in a
conference call. “The more loans these banks make to these
business customers, the better deal they are going to get.”

The program, which proposes carving out $30 billion from
repaid bank bailout funds, aims to provide new incentives for
small business loans and eliminate the stigma and restrictions
that caused many smaller banks to shun the Troubled Asset
Relief Program, known as TARP.

Under the plan, which requires approval by Congress, banks
would pay a 5 percent dividend on the government capital they
receive from the proposed Small Business Lending Fund — the
same as the initial TARP rate — and this would decline to as
low 1 percent as funds are loaned out.

They would receive a one-percentage-point decrease in their
dividend rate for every 2.5 percent increase in incremental
business lending demonstrated over a two-year period.

Banks could receive funds equivalent to 3 percent to 5
percent of their risk-weighted assets under the programs,
depending on their size.

CONVERTING EXISTING TARP BANKS

The program also would allow banks with less than $10
billion in assets that currently have TARP funds to convert
that capital to the new program. This would immediately lower
their funding costs on loans already made with TARP money,
assuming they have increased lending above a certain baseline.

Treasury officials view it as a way to perusade banks to
stop hoarding their TARP capital and put it to work, and get
banks out of the TARP program without repayments.

Any conversions of TARP funds, however, would come out of
the same $30 billion cap for new capital, a Treasury
spokeswoman said.

The Treasury did not have an estimate on how many banks
were likely to convert to the new program, the spokeswoman
said, adding, “We anticipate that it will be an attractive
option to many banks.”

The plan drew a quick endorsement from the Independent
Community Bankers Association, which said it was “strongly
supportive” of the proposal. ICBA had been critical of many
aspects of the TARP program, including dilution of their small
shareholder bases from requirements to issue stock warrants to
the Treasury.

Gene Sperling, a counselor to Geithner at the Treasury,
said around 600 small banks had applied for TARP funds in early
2009, but decided to drop out of the program, citing the stigma
associated with it. TARP restrictions include the capping of
cash salaries at around $500,000 for executives at banks in the
program, but this level is not considered a major problem for
most community banks.

“The main barrier for them was the desire not to be labeled
a TARP recipient,” Sperling said.

Even though many of these were strong institutions that had
been encouraged by regulators to seek extra capital to help
them weather the financial crisis, they soured on TARP after
massive bailouts of American International Group (AIG.N: ) and
other institutions sparked public outrage last spring, along
with big bonus payments, Sperling said.

Instead of trying to design a new program within the
confines of TARP, Sperling said the Treasury believed that it
would achieve greater participation by creating a new program.

Stock Trading

(For further details on the proposal, see: [ID:nN02112889])

UPDATE 2-New US bank plan offers lending incentive -Geithner