For banks awaiting word on whether they are eligible for capital infusions from the Treasury Department, approval may hinge on whether they can raise money on their own first.

An investment from the private sector would give the Treasury some assurance that banks have sufficiently plugged holes in their balance sheets and therefore would use funds from the Troubled Asset Relief Program (TARP) to make loans that help stimulate the economy, according to sources.

"Treasury is protecting their interest. They are not going to make investments that they are concerned might go bad," said Brian M. Mellone, amanaging director of fixed-income banking for Regions Financial Corp.'s Morgan Keegan & Co.

The Treasury has not explicitly said that it is requiring any banks to raise capital before it commits taxpayer dollars, and it did not return calls to American Banker for comment. But in mid-November, Secretary Henry Paulson said he was "carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments."

Bankers, consultants, and lawyers say banks and thrifts with high levels of past-due loans or Camels ratings of three or four are under the most pressure to show they can attract private-sector investments.

Most observers said it makes sense for Treasury to require some banks to raise their own capital as a condition of getting of getting Tarp funds to ensure that the government is not throwing good money after bad. The challenge for these banks — especially small, privately held ones — is finding willing investors in the current economic climate before approval deadlines pass, observers say.

Raising capital "isn't something that happens in 10 days," said Jim Reber, the president and chief executive of the Independent Community Bankers of America's ICBA Securities. "It is much lengthier of a process, and I think a more lengthy process now than in 2005."

That some banks are being asked to find capital on their own illustrates how the program has evolved since it was first rolled out in October. The Treasury said then that it would invest in healthy banks that would use the money for lending, but since then it has encouraged some stronger banks to use the funds to absorb weaker ones and has softened its stance on letting banks use the money to aborb loan losses.

The Treasury said it expects investments in publicly held banks to be completed by yearend. For privately held banks the approval deadline is Jan. 14.

Several observers say the Treasury is backlogged and could extend the deadlines. Nonetheless, John Carusone, the president and managing principal of Bank Analysis Center  in Hartford, Conn., said the clock is ticking as he scrambles to raise capital for several of his clients.

Carusone works mainly with small banks. At one point last week he said he had been in his office for 36 straight hours working on capital-raising plans.

According to a report KBW's Keefe, Bruyette & Woods released Monday, 86 publicly traded institutions seeking Treasury funds are still awaiting approval. It is not a complete list, because not all public companies have disclosed that they have filed applications. The report also does not include requests from privately held banks.

Carusone said privately held and thinly traded publicly held banks are under particular pressure to find outside capital.

"Publicly held banks have the advantage of having an arbiter of value: the stock market," he said. "To the extent of not having an arbiter of value creates a higher degree of risk, that needs to be compensated by private capital that acts as a buffer."

One publicly traded banking company, Bridge Capital Holdings in San Jose, Calif., said its request for $24 million was contingent upon its ability to raise private-sector capital. It recently received a $30 million commitment from a private-equity group.

The $14.2 million Flagstar Bancorp in Troy, Mich., said it expects the $250 million commitment it received last week from a New York private-equity firm to enhance its chances for receiving TARP funds.

Mellone said conditional deals offer a "prudent lifeline to the banks that have the ability to survive, but where the Treasury investment wouldn't be sufficient to provide the strength and stability that the bank needs."

At the same time, he said a commitment from Treasury "lowers the risk profile" for private-sector investors.

Joe Ford, a partner in the Austin office of DLA Piper, said the amount the Treasury is requiring bankers to raise on their own varies. In some cases a bank may need to raise an amount equal to or greater than what it is seeking from the government; in other cases, it might need to raise less.

"The ratios being applied aren't for matching dollars," he said. Banks are asking some private-equity groups that are working with him to make "a token or a small investment," in order for them to win approval for Treasury funds.

Still, for many banks awaiting Treasury approval, raising even a small amount of additional money could be easier said than done, Ford said.

Before the Treasury began investing in banks, many were having trouble raising funds on their own. Being asked to do so as a condition of getting Treasury funds "is a death warrant for some banks," he said.

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