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The Small Business Lending Fund's Tepid Results

Nearly three years ago, in his State of the Union address, President Obama announced a plan to use $30 billion in money repaid by Wall Street’s bailed-out banks to help community lenders make loans to Main Street companies.

The plan, part of the Small Business Jobs Act, passedalong party lines in the Democratic Congress that summer. At the time, the lobby for community banks breathlessly suggested that banks could leverage the capital to make as much as $300 billion in new loans to small businesses.

The results have been much more tepid. The program, known as the Small Business Lending Fund, finally started moving money into banks last year. Only $4 billion of the $30 billion available was disbursed. The banks that got it did increase their small business loans, by $6.7 billion, according to the Treasury Department.

But the majority of the money that the government invested—some $2.2 billion—actually went to help community banks repay their earlier government bailouts. (Remember, it wasn’t just Wall Street that got rescued four years ago.) And while those lenders did modestly increase their small business loans, most of the help that reached Main Street came from banks that didn’t use the new money to repay bailouts, a Bloomberg Businessweek analysis of Treasury data (pdf) shows.

Critics at the time, such as Raj Date, predicted this. Date, now a deputy director of the Consumer Financial Protection Bureau, two years ago was an outside analyst who called the plan “TARP Junior.” He said most of the capital would go to patching holes in bank balance sheets left by legacy assets such as commercial real estate loans gone bad. At the time he told me the money might support $70 billion in new lending. That figure now seems wildly optimistic.

The dividend that participating banks have to pay to the Treasury drops from 5 percent to as low as 1 percent if they increase their small business loans. The Treasury hoped that banks would leverage the capital, lending out several dollars for every dollar the government invested, and many of the 332 participating lenders did. But nearly a third didn’t even increase their small business loans by the same amount of money they got from the government, let alone leverage it.

In some cases, banks say the demand from small businesses just wasn’t there. First Merchants Corporation, an Indiana bank with $4.2 billion in assets, took $90 million in capital from the Small Business Lending Fund. (Some of that went to pay back TARP money.) Even so, the bank decreased its small business loan book by 20 percent, or $260 million, according to Treasury data.

“If we could make the loans, we would,” says David Ortega, first vice president and director of investor relations. “We expected the economy to be improving. Since it really hasn’t, that’s really affected the amount of demand for the small business lending.”

In aggregate, banks that used the new money to repay TARP loans increased their small business lending by about 10 percent, and loaned out about one dollar for every dollar they got from the government. For the banks and community lenders that weren’t repaying earlier bailouts, the results were much better. In aggregate they boosted lending by 35 percent and loaned out three dollars for every dollar they got from the government.

It’s still early days for the program. The data measure lending through June 30, which is less than a full year since some of the participants got their capital from the Small Business Lending Fund. The Treasury points out that nearly 90 percent of banks in the program have increased small business lending, and three-quarters have boosted it by at least 10 percent. And lenders in the SBLF program increased small business loans more than a comparable group of banks that didn’t participate, the Treasury says.

The recovery in the past two years has been slower than most expected. Lending by banks in the program picked up this year, increasing by $1.5 billion in the second quarter alone. Maybe in time it will look like a better deal. One year in, though, it appears to have helped banks far more than it has helped businesses.

Tozzi is a reporter for Bloomberg Businessweek in New York.