The federal government’s $250 billion plan to hoist U.S. financial institutions out of trouble urges banks to lend again. However, the cash will most likely help further consolidate the industry, with some banks already saying they intend to use the funds to help make acquisitions, according to The Wall Street Journal.
“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, that capital,” Treasury Secretary Henry Paulson said on Monday to WSJ. Paulson has insisted that the government’s investment is to restore confidence in the banking sector so banks will lend again and private investors will put up capital for banks.
Using the money for acquisitions could cause controversy as taxpayers watch their money help stronger banks acquire smaller institutions.
Mergers are looked upon more favorably than acquisitions. “If a healthy institution is making an acquisition, we would look very favorably on that,” a senior government official said to WSJ. The government views consolidation as beneficial if it helps weaker banks survive instead of going under.
Zions Bancorp, a Salt Lake City-based bank hurt by losses on real-estate loans, expects to apply to sell the government between $500 million and $1.5 billion in preferred stock, and may use some of that money to fund acquisitions.
Zions plans to use government money “to take advantage of what we would expect will be some acquisition opportunities, including some fairly low-risk FDIC-assisted transactions in the next few quarters,” said CFO Doyle Arnold on a recent earnings conference call.
Some banks contend that they do not need more capital and are unlikely to apply. Banks have until November 14 to submit an application to their primary regulators.