Why banks are repaying TARP funds

April 27, 2009
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The commercial bankers just cannot win! Our politicians have stoked the rhetoric excoriating banks for not lending out the TARP funds (which has been debunked), then Congress recently changed the terms of the TARP agreements to make the terms much more onerous for TARP participants. Predictably, this has caused several banks to pay back the funds to the government; others have said they plan to pay the funds back soon. Now, many politicians are complaining that the banks should keep these funds to help the economy.

The TARP program was originally instituted to help begin to thaw the credit freeze that took place in 2008. The program, as originally instituted, has actually done a decent job. The credit markets are beginning to work again — maybe not as robustly as some would like, but we are in a recession.

But why would the banks pay the funds back before they are required to do so? First, be clear that the only banks that will be allowed to pay back the funds will be those that have capital positions, without the TARP funds, that fit the longstanding regulatory definition of “well-capitalized.” These banks took funds either for strategic purposes or because they were asked to by the U.S. Treasury department. Most banks did not need the funds, but thought they were helping out the government during the credit freeze.

TARP funds are very expensive to the banks. They must pay an annual rate of 5 percent on these funds, when they can get deposits for a much lower rate.

Congress changed the terms of the TARP after most of the agreements had already been made. In essence, the Congress has decided that they will dictate how the banks will be run going forward, over and above regulations that have always been in effect. Banks see this as a major violation of our country’s notion of free enterprise, and are trying to get out from under this government control.

So, there are three basic reasons some banks have already returned TARP funds and more banks will do so in the near future: 1) at a 5 percent dividend rate, TARP is very expensive capital and hurts earnings; 2) unexpected and unwelcome interference and dictation by politicians in the management of the company, which violates all principles of our country’s free-enterprise traditions; and 3) the bank is classified as “well-capitalized” and does not need the funds.

The best thing that can happen for the long-term health of our economy is for every bank that can qualify as “well-capitalized” without TARP funds to pay back these funds as soon as possible. Hopefully, they pay them back before the politicians change current long-standing regulations and probably make it impossible to qualify for “well-capitalized.”

Most solutions that are coming from Congress on a myriad of financial issues point to the desire of our government leaders to take over and operate outside of free-market principles. The politicians must not be allowed to destroy the best economic system that has ever been created: Even with all of its faults, the concepts of free-enterprise constitute the only economic system that works in the long-run.

Thomas J. Alexander is associate professor and chair, Banking & Finance, Northwood University, Midland.

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