Smaller banks likely to think hard before joining in aid program

— -- Some of the nation's smaller banks will accept Washington's plan to buy stock in their institutions, but most will weigh concerns about financial stigma and Big Brother oversight before deciding whether to opt in, banking industry officials said Tuesday.

"There's preliminary interest among some banks. But not everyone, by any means," said Edward Yingling, president and CEO of the American Bankers Association.

The nation's most troubled banks won't be eligible for a shot of the $125 billion infusion, because federal regulators plan to treat them separately, with more restrictions, said Yingling.

Banks must decide whether to participate by Nov. 15.

Most community banks have ample funds and don't necessarily need a federal booster shot of cash. FDIC Chairwoman Sheila Bair estimated in a speech last month that 98% of U.S. banks "are well capitalized" despite recent rises in problem loans, mounting loss provisions and increased expenses for credit losses.

Banks that are nonetheless interested in the new federal program "see it as a way to solidify their capital base for growth" by providing funds that could be used to "backstop additional lending," said Yingling.

But he warned that banks fear that opting in could brand them as financially weak. The concern is particularly acute among the nation's smaller community banks that operate in one or two counties at most, said Camden Fine, president and CEO of the 5,000-member Independent Community Bankers of America.

"Once it becomes known that that bank has asked for and received government ownership assistance, there is a stigma," said Fine. "The appearance is that the bank … is the weak sister, it's the wounded antelope."

Additionally, bankers want to examine the plan's restrictions on executive compensation, as well as determine whether opting in would subject their institutions to other, potentially onerous government operating rules.

"If you're a banker, are you going to have politicians second-guessing the type of loans you make?" asked Yingling.

Fine said any limits on dividends could represent a deal-breaker for owners of small community banks, because "dividends are the livelihood of the investors."

The Treasury Department also has not yet announced how the plan would include mutual institutions that don?t have stock, banks operated by so-called sub-chapter S institutions — essentially partnerships — and private banks that lack public stock. These represent more than half of all community banks, said Yingling.

Along with the financial details, Fine said bankers must come to terms with political and philosophical differences about the plan, the first federal government ownership venture in the U.S. banking system since the Great Depression of the 1930?s.

?It may be necessary, but it?s really a sad day for the United States financial system,? he said. ?It goes against everything I was raised to believe about the free markets.?