"In practical terms, they're going to select banks that are good candidates for deploying this capital," said Walter J. Mix III, a former California banking regulator who is now at the consulting firm LEGC.
Many banks are expected to be eager supplicants.
The capital comes in the form of government purchases of nonvoting preferred shares that will carry a 5% interest rate for five years. That's much less than the cost of capital that can be raised currently from other sources, industry experts say.
Banks that accept the money will have to give the government the right to purchase stock worth 15% of the capital infusion and agree to limit compensation for their top executives, but those restrictions are probably not onerous enough to counterbalance the low interest rate.
"Even the strongest-capitalized banks would be hard-pressed not to look into the program," observed analysts last week at investment bank Keefe, Bruyette & Woods, which specializes in the banking industry. They quoted an unnamed bank executive saying, "Why look a gift horse in the mouth?"
"The question to ask is whether you will need this capital any time in the next two years," said Nichols of Banc Investment Group, a unit of Pacific Coast Banker's Bank of San Francisco. "Capital is so expensive that if there is any chance you'll need it, you should get it now."
Treasury officials have not spelled out their selection standards, other than to indicate that failing banks won't be eligible for the assistance and that "systemically significant" big banks will get special attention.
A key question is how explicit the regulators will be in telling banks how to deploy the new capital. Some experts say regulators typically don't have to spell out their thoughts.
"There are a lot of informal messages and understandings that occur between regulators and their regulated banks," said Joseph T. Lynyak, an expert in bank regulatory law at the Venable law firm in Los Angeles. "People generally understand what the other side is asking for. In this case, Treasury wants to get value for their money, and the value proposition is loosening credit."
But some believe that banks applying for capital will have to give explicit assurances that they will use the money for loans.
"I think you're going to have to give your primary regulator some sort of plan for what it's going to be used for," Nichols said.
