Just 90 days ago, unprecedented levels of fear existed among businesses and consumers about the stability of the U.S. banking industry. Now, strong banks are getting a boost from the U.S. Treasury’s Capital Purchase Plan (CPP), which is investing $250 billion in banks that have been approved to participate in the program by primary regulators and the U.S. Treasury. The program has been successful in quelling fears and restoring confidence and both consumers and businesses will benefit from banks’ strengthened balance sheets, which frees up funds for lending.
“Anything the government can do to add stability to the banking industry overall is a good move,” says Brian Keenan, president and CEO of Fifth Third Bank, Tampa Bay. “We have been making loans all along, but CPP will allow us to be more flexible with strategic lending opportunities.”
Smart Business spoke with Keenan about how consumers and businesses will benefit from the Treasury’s investment in banks.
How does CPP enable banks to lend?
The CPP is part of the $700 billion Emergency Economic Stabilization Act, signed into law in October. Through the CPP, the government will invest in senior preferred shares of financial institutions, and then encourage the banks to buy back the shares from the government when the markets stabilize. It is designed to help strengthen the balance sheets of many U.S. financial institutions by helping them raise their capital levels. This additional capital positions banks to weather volatility in the economy and to extend credit to qualified businesses and consumers.
Is this program a bailout?
The term ‘bailout’ is not appropriate for this program. It’s really intended to be an investment in banks, which will generate a return for U.S. taxpayers in addition to stimulating the economy. The CPP is designed to assist financial institutions in fulfilling their important economic role of making loans to businesses and consumers and getting all of us closer to our goal of a stronger U.S. economy. I realize that Americans aren’t necessarily comfortable with their government investing in financial institutions, but keep in mind that these are investments, which have to be paid back when the economy rebounds.
How does the program restore confidence?
One benefit of the CPP is an increase in confidence, and we have already sensed greater calm among our customers because they feel the U.S. banking system has stabilized. People were panicked to the point that they were considering withdrawing their money from banks altogether, which is not the right thing to do. As financial institutions, like Fifth Third Bank, are approved for a Treasury investment, it sends a signal of strength to their customers, not only because of a boost in capital levels but because the Treasury has suggested that it will only invest funds in healthy institutions. Also, the increased coverage limits provided by the FDIC are helping depositors feel reassured about the safety of their money.
How will the Treasury’s investment benefit consumers and businesses?
When the CPP invests in strong banks, it provides them with additional capital, which increases their ability to extend credit to qualified businesses and consumers. As barriers are removed, banks will be better able to maintain and increase lending levels to strong businesses to ensure their operations are uninterrupted. This is designed to increase economic activity and reduce some of the negative impact of the current economic environment.
The additional capital should also make it easier for qualified borrowers to get mortgages and other types of loans, and we’ve recently seen a drop in interest rates, which is helping homeowners refinance to more affordable terms. The CPP gives banks more flexibility to help those who may be facing foreclosure or having difficulty making payments on other kinds of obligations.
What else can banks do to help customers in these difficult economic times?
The economy is still highly volatile, making it difficult to plan. We’re spending more time consulting with business executives, helping them forecast for the first quarter and budget for 2009 interest expenses. We’re also working with consumers to reduce banking fees, evaluate their portfolios and plan for their retirement. It’s important for businesses and consumers to review their finances proactively and initiate conversations with their banker if there’s even the slightest chance they might fall behind on business loan or mortgage payments. With strengthened balance sheets as a result of CPP, your banker has more options to help you get through these turbulent economic times.
BRIAN KEENAN is president and CEO of Fifth Third Bank, Tampa Bay. Reach him at (813) 306-2453 or email@example.com.