Stress Tests & TARP Funds May Be Penalizing Local Banks

With big banks applying to repay TARP funds early, liquidity returning to the financial sector, and previously endangered institutions such as Bank of America on the way to raising nearly half the requisite $34 billion in stress-test qualifying funds, things are looking rosier in the financial industry in general. At least on a national level, they are.

In reality, the U.S. banking industry is mending at very different rates, depending on the area code. That may be penalizing regional firms.

Take, for example, Regions Financial, a bank holding company based in the South, Midwest and Texas. While April's stress test found the firm had a capital shortfall of $2.5 billion to qualify for passing, Regions Financial is finding less luck than Bank of America in raising the much smaller amount. Regions Financial can raise up to $1.05 billion in share sales, but it is having to get more creative to come up with the rest of the money. A final resort may be for the bank to convert some of its $4.5 billion of subordinated debt, a move that would disadvantage some of its most vulnerable shareholders such as pension funds.

Then there's Wintrust Financial, an Illinois-based bank. Wintrust chief executive Edward Wehmer recently indicated that his firm won't consider paying back any of the TARP aid until later this year. While government capital is constraining Wintrust's hiring and bonus flexibilities, it is also key if the bank wants to expand in the tough regional climate, according to Wehmer.

As was pointed out here at BNET last week, the trend of smaller banks scrambling to raise money is widening daily:

Among smaller U.S. banks, 32 have already failed this year. The most recent was America West Bank in Utah. "Smaller" doesn't mean insignificant, either: America West had assets of $299.4 million, and deposits totaling $284.1 million.

"Obviously this is going to be one of the best quarters in history because of the amount of capital raises in the past 10 to 12 days," Richard Bove, an analyst at Rochdale Securities told Reuters this week.

It's often been noted anecdotally that in times of crisis, the rich get richer, while the poor tend to fall by the wayside. So it may be for banks -- no thanks to the government TARP program. Even though Bank of America's required capital dwarfs the single-digit billion dollar sums regional banks have to cobble together, that doesn't mean doing so is harder work.

One potential side effect of the TARP program then may well be then that the U.S. is left with a few very, very big financial institutions who control the lion's share of local business across the country. Unfortunately, that will only create another headache for regulators, who will then be left with a host of anti-trust dilemmas to sort out.

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