ABA Testifies On Status of Capital Purchase Program and Future Use of TARP Funds

The American Bankers Association urged Congress today to segregate the Capital Purchase Program (CPP) from other Troubled Asset Relief Program (TARP) initiatives and made some recommendations to Congress regarding future use of TARP funds.

Testifying before the House Financial Services Committee, ABA President and CEO Edward L. Yingling stated that confusion about the difference between the CPP and other TARP initiatives still exists and has been a source of great frustration for banks.

However, Yingling said that he viewed the hearing and the legislation that is being proposed “as an opportunity for a new beginning.”

“We are committed to working with this Committee to clarify once and for all the purpose of the Capital Purchase Program, to target the remaining TARP money where it will do the most good, and to provide the transparency needed to restore public confidence,” he said.

Yingling emphasized that the CPP was designed to focus on healthy banks and its purpose is to promote the availability of credit.  This distinguishes it markedly from the use of TARP funds to support troubled institutions like AIG, General Motors and Chrysler, and from the capital injection programs for weak banks in Europe and elsewhere.

“The bottom line is that the traditional banks that have been making loans in communities for decades should not be lumped together with other institutions that are in need of financial support,” said Yingling.  “The CPP is designed to enable the banking industry to be a strong source of credit going forward when other sources – such as securitization – have closed down.  [It] should be clearly separated from a program to address potential failures of systemically important institutions and, of course, from a program to address the foreclosure crisis,” he said.

Yingling further recommended that the CPP be fully funded as originally announced, noting that there are still no term sheets for the more than 3,000 healthy mutual savings banks and S-corporation banks that may want to participate in the program.

“We believe strongly that the current commitment should be fulfilled in order to prevent competitive disparities from occurring and to assure that every community has the same opportunity for its banks to participate, so that increased credit availability will spread across the country.”

Yingling also said that TARP funds should be used for foreclosure prevention efforts, and offered some specific suggestions for improving the FDIC‘s recently announced loan modification program.

“The housing crisis is still at the heart of the current economic turmoil,” he said.  “We support using the FDIC proposal as a base, and we have put together a group of experts to make recommendations to the FDIC and Congress to make it work.

Finally, Yingling noted that there is an inherent conflict in difficult economic times between lending more to help our communities and making sure lending decisions are prudent.  He therefore recommended that the Congress, the regulators and the incoming Administration adopt a consistent approach to the banking industry.

 “We recognize this is not easy,” he said.  “But all roads point to traditional, regulated, FDIC-insured banking as the foundation for a solid recovery.”