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Small Bank Bailouts Under Consideration

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WASHINGTON — Treasury officials and regulators are weighing a fresh round of bailouts for banks that were deemed too risky to qualify for earlier aid.

Representatives from the Treasury Department, Federal Deposit Insurance Corp. and House Financial Services Committee discussed the plan by phone Thursday, said California Bankers Association Chairman Dan Doyle, who was on the call.

Small community banks are struggling as commercial real estate and other loans go sour. Officials and industry representatives are considering how to get money to those banks, Doyle said Friday.

The new program could force Treasury to postpone closing its $700 billion bailout fund, which is scheduled to expire this year. That decision has become a political hot potato amid public backlash against bailouts and a rising deficit.

Other banking industry leaders confirmed that the conversations are taking place. They did not know when Treasury might announce the plan.

Treasury spokesman Andrew Williams would not comment on the proposed program. Treasury is "continually monitoring economic conditions and exploring options to ensure that a sustainable recovery is taking hold on Main Street," he said in a statement. An FDIC spokesman did not respond to requests for comment.

The money could go to banks whose ratings by regulators made them too weak to qualify for earlier rounds of funding. It may be limited to banks with less than $5 billion on their books. The banks could be required to raise matching money in the private markets, Doyle and others said.

"The rules were pretty restrictive," Doyle said. "They want to give another opportunity for some of the community banks."

As with earlier capital injections, banks eventually will have to repay Treasury with interest.

The move could prevent some small bank failures, which would ease pressure on the FDIC's dwindling fund that insures bank deposits.

House Financial Services Committee Chairman Barney Frank, D-Mass., has been "very, very supportive" of extending the program to reach more community banks, said committee spokesman Steve Adamske. Frank had talked with Treasury Secretary Timothy Geithner about the plan, Adamske said.

"We're very concerned about the community banking sector," Adamske said. "We await Treasury's decision."

One challenge is that the program was designed for larger banks that are publicly traded, he said. Many community banks are privately owned or held by small groups of investors, making it more complicated for them to participate.

A leading bailout critic on the committee called the proposed expansion "a uniquely bad idea."

"It creates even greater taxpayer exposure for the program, where the taxpayer is certainly not going to recoup anywhere near his investment," said Rep. Jeb Hensarling, R-Texas, who sits on the congressional panel that oversees the $700 billion fund.

At a forum Friday, Rep. Maxine Waters, D-Calif., told Federal Reserve Chairman Ben Bernanke that she worries about the ability of small and minority-owned banks to access capital.

Bernanke responded that the "the best source" was the government's $700 billion bailout fund. He also said the government was looking at expanding the program to make it available "very broadly for access." He offered no details.

Rep. Jim Costa, D-Calif., who arranged for Thursday's call, said bankers in his Fresno district were suffering from high unemployment and foreclosure rates. He said the additional money would allow banks to lend more to "those who need it most."

Small banks currently have until Nov. 9 to apply for the money. If more banks are deemed eligible, the deadline could be pushed back, as the application process can take months to complete.

The plan could prevent officials from winding down the $700 billion fund that is set to expire on Dec. 31.

Republican lawmakers and some Democrats want Treasury to stop lending now that the financial markets have stabilized. Frank said this week that he supports extending the program beyond the end of the year.

Geithner has trumpeted the end of some emergency financial programs as signs the economy is recovering. The department expects to see tens of billions of dollars in additional repayments to the fund in coming months.

But Doyle said FDIC officials still expect up to 150 bank failures this year. So far, 95 banks have been closed. That's the most since 1992, during the savings-and-loan crisis. Officials are scrambling for a way to add money to the deposit insurance fund, and may levy a second extra fee on the banking industry.

Officials have said the capital injections from Treasury are intended for healthy banks not at risk of failing.

Lobbyists for small banks say the rules have been too restrictive, discriminating against smaller institutions that are likely to succeed.

"We believe the criteria to determine viability have been too strict," said Karen Thomas, the top lobbyist with the Independent Community Bankers of America.

Banks that want government money should be required to raise some private capital to prove that the market believes they will succeed, she added.

The program would help "avoid any preventable bank failures," bolster the FDIC's deposit insurance fund and help small banks "weather the storm," Thomas said.


AP Economics Writer Jeannine Aversa contributed to this report.

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