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Feb 02
2010
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The President has called on Congress to create a new Small Business Lending Fund that will transfer $30 billion from the Troubled Asset Relief Program (TARP) to this new program to support small business lending. The proposal would be to use the Small Business Lending Fund to offer government capital investments to community and smaller banks with an incentive structure to support new small business lending.
The program would be available only to banks with assets under $10 billion. The theory behind this is that these banks conduct the highest percentage of their lending to small business, accounting for 50 percent of all small buiness loans nationwide while making up only 20 percent of all U.S. bank assets. According to the Independent Community Bankers of America (an advocacy group for the nation's nearly 8,000 community banks), over 98% of the nation's banks have assets of $10 billion or less. The new program would be separate from the TARP program to encourage greater participation, since the banks would not face the notorious TARP restrictions such as limits on executive compensation and dividend payments, as well as requirements that TARP banks give stock warrants to the Treasury.
With the core function of the new Fund being to offer capital to qualifying banks with incentives to increase small business lending, the proposal is structured to entice banks to increase lending immediately. The government capital would come with an initial dividend rate of 5%. By increasing their small business lending over 2009 levels over the next two years (on the basis of new lending beginning January 1, 2010), banks could receive a 1 percentage point decrease in their dividend rate on the capital for every 2.5% increase in business lending, down to a minimum dividend rate of 1%. Banks would realize this reduction in dividend rate sooner if they make early, but consistent progress towards increased lending. After 5 years, the dividend rate would be increased to encourage timely repayment.
Banks would be eligible to receive up to 3 - 5% of risk-weighted assets in capital investment from the new Fund. Banks with less than $1 billion in assets would be eligible for up to 5% of their risk-weighted assets and banks with $1 - 10 billion in assets would be eligible for up to 3%.
The Administration is counting on the Fund's $30 billion to be leveraged by the participating banks when increasing lending, resulting in new lending amounting to several times over the $30 billion in capital provided to the banks.
Will the new fund get through Congress? If so, will banks participate? Is the demand there for quality small business lending amidst a weak economy? Time will tell, but one thing is for sure--to have a chance for a real impact, the Fund needs to be put into place quickly.
The aforementioned Independent Community Bankers Association (ICBA) issued a news release on February 2, 2010 supporting the Small Business Lending Fund proposal stating that " this new $30 billion small business fund would help small businesses fuel local job creation and economic stability. In fact, every dollar of capital that goes into community banks has the potential to be leveraged eight to ten times--a substantial and positive impact for both small businesses and our communities".
It should be well worth the time of Main Street America to follow the developments of this new plan.
