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TARP: Stabilized banking system, but didn't increase lending

Feb. 28, 2010 |


This story was co-published with USA TODAY.

As the financial system began to unravel in the fall of 2008, the federal government rushed $250 billion in emergency assistance. One of the bailout’s main goals: get banks to lend more money to pull the economy back from the brink of a meltdown.

Treasury Secretary Timothy Geithner told the Senate in written responses to questions during his confirmation process: "Healthy banks without major capital shortfalls will increase lending above baseline levels" because of the program.

Yet the enormous injection of taxpayer money didn’t accomplish that objective. Banks that took the federal aid continued to cut lending; in fact, they reduced lending more dramatically than banks that refused bailout funds, an analysis of the program finds.

Moreover, the more than 900 banks that took the aid provided employees bigger pay raises and cut staff by less than the 7,420 banks that didn’t get aid, according to a study for USA TODAY by American University's Investigative Reporting Workshop.

The analysis is the first systematic look at the results of the Troubled Asset Relief Program (TARP). It used federal bank data to track the behavior of the two sets of banks through Sept. 30, 2009, end of the most recent quarter for which data have been analyzed.

"It seems that market forces did a better job encouraging banks to get their act together than did government assistance," says Alex Pollock, a veteran banker and now a scholar at the conservative American Enterprise Institute.

Among the key findings: 

  • Lending. Loans to businesses by banks that accepted TARP money fell 16.6 percent compared with an 11.1 percent  drop at non-TARP banks. Loans to individuals were down 6.2 percent at TARP banks but rose 4.7 percent at banks that didn’t take TARP money. At the same time banks were getting government aid, they were increasing the amount invested in Treasury bills and other ultra-safe securities.
  • Salaries. The average salary for people who work at TARP banks rose from $60,000 to $65,700 in the 12 months ending Sept. 30, a nearly 10% increase. By contrast, non-TARP banks increased average salaries from $49,700 to $50,300, or about 1 percent. The average pay increase for all American workers during the same period was 2 percent.
  • Employment. TARP banks reduced employment 0.4 percent for every $1 billion of assets. By contrast, non-TARP banks cut the number of workers by 6 percent for every $1 billion in assets. Branches. TARP banks increased the number of branches by 6.6 percent for every $1 billion in assets. By contrast, non-TARP banks cut their branches by 1.2 percent.
  • Profits. Aggressive cost-cutting helped non-TARP banks improve their financial performance. Profits fell 19 percent in the nine months ending Sept. 30 while plunging 72 percent at TARP banks.

Program coming to an end

TARP is now winding down. Treasury made its last purchases under the program in December. About two-thirds of the money has been repaid, with the biggest banks the most eager to get out of the progam. But it remains highly controversial, savaged by critics as an unwarranted government bailout of financial institutions that acted irresponsibly and helped trigger the worst financial crisis since the Great Depression.

"TARP helped make us a bailout nation. It’s enshrined ‘too big too fail’ in our banking system," says Rep. Jeb Hensarling, R-Texas. "To the extent it was designed to encourage lending to business, it’s been highly ineffective."

The Treasury Department, which runs TARP, says the program did succeed in providing loans to businesses. Treasury spokesman Meg Reilly says the new analysis doesn’t show the program’s success because it’s "an apples-to-oranges comparison."

Reilly says TARP and non-TARP banks differed in size, types of loan portfolios and other respects. "One wouldn’t expect their lending patterns to be comparable. The important thing to remember is that overall lending is improving as a result of the government’s actions," she says.

However, the Federal Deposit Insurance Corp. reported last week that total lending by all banks fell by $587 billion, or 7.5 percent in 2009, the biggest decline since 1942

TARP banks generally were bigger than non-TARP banks, although both categories included institutions big and small. The average TARP bank had assets of $10 billion and included giants such as Citibank. Non-TARP banks were mainly community banks and had average assets of $550 million.

Citigroup, the nation’s largest bank and a recipient of $49 billion in TARP money, slashed its loan portfolio by 17 percent — more than $100 billion — in the first year of the TARP program. The bank reported a $7.6 billion fourth-quarter loss Jan. 19, partly the result of repaying $20 billion in TARP money.(Insert Citigroup quote about TARP here.)

To measure the effect of size, the analysis examined how bigger TARP banks, holding $50 billion or more in assets, compared with smaller banks. The smaller banks in TARP reduced lending 17 percent while the bigger banks cut lending 7 percent. In both categories, big and small, banks accepting government funds reduced lending more than banks that didn’t participate in the program.

Born in crisis

President Bush signed the law creating TARP on Oct. 3, 2008, at the height of the financial panic. Credit had dried up. Fear of widespread bank failures ran high. "The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses," Federal Reserve Chairman Ben Bernanke said then.

The program originally was designed to buy bad loans and investments from financial institutions but quickly evolved into a catch-all effort to pump cash into a wide range of institutions, including Wall Street investment banks, insurance giant AIG and General Motors.

Bank analyst Bert Ely of Ely & Co. says it’s difficult to know whether the government aid played a role in banks lending less. "The question is cause and effect. Banks participated for different reasons. Big banks were pressured to join whether they needed it or not," he says.

Ely says he told banks not to join because they would regret the burdensome strings that always come with government aid. Among the items bankers have most resented are attempts to limit pay to top officials.

"It was definitely a tale of two worlds — banks that took TARP and those that didn’t," says Michael Achary, chief financial officer of Hancock Bank, a $3.5 billion Mississippi bank that increased lending at the same time it cut costs.

Hancock Bank considered taking TARP money but decided against it. The company raised $175 million from private investors and generated additional capital through earnings. "The free market can take care of a lot of things better than government intervention," he says. His bank acquired the assets of a failed Panama City , Fla. , bank in December.

Aiming for stability

Achary and many other bankers who rejected TARP money agree that the large injection of government cash did achieve one important goal: stabilizing the financial system during a crisis.

"It was the right thing for the government to do at the time," says Russell Weyers, president of Johnson Bank, a $5.6 billion institution in Racine , Wis. , that didn’t take TARP funds. His bank has increased lending during the last year.

He says his bank didn’t relax lending standards during the real estate boom. Now, it’s picking up quality customers from competitors during hard times. "If we’re not lending, we’re not doing what we’re supposed to do," Weyers says.

Weyers says banks with troubled loans shouldn’t be expected to increase lending, even if they took TARP money. "Too much lending isn’t fixed by more lending," the banker says.

Some healthy banks that received TARP money say it’s hard to quickly lend new money because credit-worthy borrowers are intentionally reducing their debt.

Ken Wilcox, chief executive of the $13 billion Silicon Valley Bank in Santa Clara, Calif., says his bank — a major lender to venture capital firms — is working hard to lend money, but many firms don’t want to borrow heavily in a weak economy.

"We have more borrowers, but our total loans are down," says Wilcox, whose bank repaid $235 million in TARP money in December.

For example, Silicon Valley Bank lends to high-tech companies that need cash for short periods to fulfill new orders. As sales have fallen during the recession, companies have fewer orders and less need to borrow. Result: The bank’s loan portfolio fell 12.5 percent in the year-ended Sept. 30.

At the same time, Wilcox’s bank has been flooded by more than $1 billion in new deposits from customers seeking a safe place to put money. The new deposits are parked mostly in ultra-safe government securities, rather than in business loans.

That will change when the economy turns around, Wilcox says. "Sales drive the economy, not debt," Wilcox says.

Wilcox says his bank took TARP funds because, in the early days, it added to a bank’s reputation for soundness. But the politics changed as the program came to be viewed as a bailout and stigma of financial weakness.

Turning the tide

Today, banks that avoided TARP are getting the respect — and growing.

Community Bank of Pasadena increased its loan portfolio — mostly lending to businesses — by $50 million in the last year while other banks were contracting.

"We were well-capitalized and conservative during the good times. We didn’t need TARP," says David Malone, chief executive of the $2.5 billion bank.

Now, Community Bank is going after the best clients from other banks. "This is an opportunity to increase our market share," Malone says.

Not getting government aid has turned into a blessing, even for the few big banks that didn’t participate in TARP.

BBVA Compass Bank, the nation’s 15th largest, didn’t qualify for TARP because it is owned by a Spanish holding company.

"At first, the stigma was not to be in TARP," says BBVA Compass Chairman José María Garcia Meyer.

BBVA Compass cut expenses, including a 1,200-employee layoff. It boosted lending to profitable niches, such as loans backed by the Small Business Administration.

While other banks cut back lending, the $68 billion bank based in Birmingham , Ala. , increased its loan portfolio 17 percent, partly by acquiring a failed bank in Texas.

"It’s a tough economy for everyone," Garcia Meyer says. "But there are opportunities out there if you do the right thing and concentrate on customers."

Dennis Cauchon is a reporter for USA TODAY.


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