The Treasury’s recent decision to pump $250 billion into the banking sector may wind up helping the regional banks and exchange traded funds (ETFs).

Laurie Kulikowski for TheStreet reports that the federal government on Tuesday said it would allocate the funds from the $700 billion troubled asset relief program, or TARP, in a bid to improve investor confidence in the banking system by jump-starting the credit markets.

Only 50% of the capital injection will be used for the largest banks and fiduciary processors. Many analysts believe the rest will go to regional banks.

Specific names within the regional space to benefit have not been announced, but as specific details within the plan become clear, more should be knon. Nine major financial institutions have agreed to participate on a voluntary basis, and the Treasury will purchase preferred shares in the institution.

Under the Treasury’s plan, a qualifying financial institution may issue senior preferred equity that equals the lesser of 1% of its risk-weighted assets, or $25 billion up to 3% of risk-weighted assets.

Participating banks will need approval from the Treasury to increase the dividend on its common stock, banks will need approval to buy back stock, and will be required to scale back their executive compensation packages.

Regional banks have managed to buck the trend that has weighed down financials this year, thanks to their lessened exposure to the toxic securities dogging the rest of the industry. But they’re certainly exposed to housing- and consumer-related credit. For many small banks, mortgage banking and other kinds of lending are key components of their businesses.

• KBW Regional Banks (KRE): down 15.1% year-to-date; up 37.1% in the last three months (black line)
• Regional Bank HOLDRs (RKH): down 30.2% year-to-date; up 21.1% in the last three months (green line)

Tags: Financial, Green ETFs, KRE, Regional Banks, RKH, Sector ETFs