Executives at the two local banks that have received shots of federal capital say the money isn't likely to spur much new lending, at least until the economy begins to recover.
"It's that old economic spiral thing. … It's really difficult in this environment to find loans that we can underwrite," said Mark Lund, president and chief executive at Auburn-based Community 1st Bank. Last month, the bank received a $2.55 million investment as part of the government's Troubled Asset Relief Program.
Since October, the Treasury has purchased nearly $200 billion in stock in roughly 350 banks, large and small, hoping to spur lending. As a rule, a bank can lend $10 for each dollar of capital it holds.
But as the economy worsens, fewer borrowers look like good risks to lenders. Rising loan defaults are eating into banks' reserves. And federal banking regulators are urging bankers to stockpile capital and lend conservatively.
"It's a stalemate," said Clarence Williams, president of Sacramento-based California Capital Financial Development Corp., which helps broker loans for small businesses around Northern California. "The mantra out there is 'Preserve capital, preserve capital' … to get through these times," he said.
In part to loosen credit markets, Treasury Secretary Timothy Geithner on Tuesday outlined another major wave of federal aid to the financial sector. While many details remain to be finalized, the program appears to include further capital injections to banks as well as a loan guarantee program to help businesses borrow money.
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