(openPR) - In October 2008, the U.S. government enacted the Troubled Assets Relief Program (TARP) with the specific intent to thaw credit markets and generate an increase in lending by financial institutions. After spending the first tranche of $350 billion, and with billions of more dollars on the way, the question still remains whether or not the TARP has made any impact on lending at all?

The unfortunate truth is despite the fact that some of the largest financial institutions are flush with billions of dollars in fresh capital, courtesy of the U.S. Department of Treasury, the TARP has had minimal impact on the credit markets. Fearful of future losses and heavily scrutinized by examiners, banks are instead hoarding TARP money to replenish depleted loan loss reserves. But, the end result is that this money has barely trickled down to those who may truly need it the most: small businesses and consumers. According to some estimates, banks are only lending a meager twenty to forty cents of every TARP dollar. As the government and treasury continue to spend countless hours and billions of more dollars trying to resuscitate these existing banks, they have neglected to consider one compelling alternative: supporting new bank development initiatives.

Government assistance in new bank development must play a role in repairing the U.S. banking system. First of all, new banks do not carry the baggage of boom time lending practices, and thus, have the envious position of not holding any bad loans on their books. These pristine balance sheets are akin to a dream for the existing troubled banks. Since banking institutions primarily earn revenues from loans, de novo banks are fresh with newly raised capital and eager to lend. In fact, de novo banks are required to provide regulators with detailed financial projections outlining the systematic deployment of capital over a three-year period.

Community banks have long been a cornerstone of the U.S. banking industry. These institutions provide consumers with tailored products and services that large bank chains cannot offer due to efficiency and standardization needs. Across the country – in small towns and inner cities and in many ethnic communities – locally owned banks cater to the under-served while avoiding riskier lending to the under-qualified.

Perhaps most importantly in this economic climate, new community banks can help thaw the local credit markets. At launch, most de novo banks raise $18 to $20 million in private capital. This is levered with the Federal Reserve resulting in approximately $200 million of lending over a given period of time. For many communities, this provides much-needed capital for business sustenance and growth.

Unfortunately, the current economic environment is stalling many of the de novo initiatives due to the difficulty in raising seed capital. Additionally, the same regulators responsible for approving new bank applications are swamped with the tall task of managing existing bank failures. Consequently, the de novo approval process is often severely delayed, as in one recent case, when a bank application sat on an agency’s desk for eighteen months without comment. This combination of challenges are significantly deterring new bank initiatives, as only a little more than 70 new banking institutions opened in 2008 compared to 146 in 2008, according to a recent report by SNL Financial.

These challenges can be overcome with the assistance of government agencies, particularly the treasury department, to create specific programs encouraging new bank development. Without question, the treasury should set aside a small portion of the TARP funds to help seed new bank ventures. A program to match privately raised funds would have a substantial impact in alleviating current capital raise obstacles, and undoubtedly spur an entire generation of new bank entrepreneurship. For instance, a $5 billion TARP fund would lead to $10 billion in new bank capital raised through a public-private partnership; resulting in $100 billion of new liquidity in the U.S debt markets. None of the existing or proposed government programs are nearly as effective as this plan in leveraging funds to stimulate economic growth and lending. This strategy will also spur job creation and community development. Each new bank on average creates 25 to 35 direct middle class jobs, while also serving the needs and interests of the residents and business owners in the community.

Such a plan can be easily implemented by the treasury, but may pose a challenge for the currently stretched bank regulators. Outsourcing some of the de novo bank applications to regulatory law firms could help alleviate the expected congestion. A relevant comparison is during the construction boom from 2004 to 2006 many such programs were adopted by city building departments all across the country to satisfy the uptick in demand for building permits.

While the big three banks and insurance companies struggle to survive, and focus on scaling down operations due to consolidation; neighborhoods all across America are desperate for fresh capital and liquidity. A new wave of community banks will strengthen the troubled banking system and can serve as a hedge against future bank failures. For the new banks to have a meaningful impact in the current environment, the government agencies must use the unprecedented amount of capital and authority they currently hold to act now.

About Zeus Capital Advisers
Based in Chicago, Zeus Capital Advisers (ZCA) is a full-service financial advisory firm specializing in a range of bank consulting services including sales, acquisitions and de novo banking. ZCA is currently developing a community bank on the north side of Chicago. The firm is also the only organization in the U.S. providing end-to-end Islamic finance solutions, as the firm creates, develops, consults and manages businesses offering Shariah-compliant alternatives to traditional investment vehicles. For more information, please visit www.zeuscapitaladvisers.com.

Matt Lachey
Principal
Talbott Strategic Communications
matt@talbottpr.com
773.447.8401