Obama Administration Announces New $30 Billion Small Business Lending Fund
Obama Administration Announces New $30 Billion Small Business Lending Fund
WASSHINGTON – Today, the President called on Congress to create a new Small Business Lending Fund. Under this proposal, $30 billion in TARP funds would be transferred, through legislation, to a new program outside
of TARP to support small business lending. This new program complements other SBA lending initiatives
the President has already announced – including support for higher SBA loan limits and extending
Recovery Act provisions for higher loan guarantees and temporary fee eliminations – as well as tax cuts
to encourage small businesses to invest, hire and raise their workers’ salaries. These efforts for small
business are a critical part of the President’s overall approach to supporting job creation.
Elements of New $30 Billion Small Business Lending Fund
1.Limited to Community and Smaller Banks Which Devote a Higher Share of Lending to Small Businesses:
The Small Business Lending Fund would support lending among small- and medium-sized banks (with
assets under $10 billion). These banks devote the highest percentage of their lending to small businesses
in their communities, accounting for over 50 percent of all small business loans nationwide, even though
they make up only about 20 percent of all bank assets.
2.Program Would Be Separate and Distinct from TARP to Encourage Participation: By transferring,
through legislation, $30 billion to a new program that would be distinct from TARP, the Administration’s
proposal would encourage broader participation by banks, as they would not face TARP restrictions.
A Core Function of New Fund Would Be Offering Capital With Incentives to Increase Small Business
Lending: The Administration’s core proposal for the new lending fund is an initiative to invest in smaller
banks capital under terms that provide strong incentives to increase lending. As participating banks
increase lending to small firms compared to 2009 levels, the dividend paid to Treasury on that capital
investment would be reduced. This proposal has two key advantages:
Capital Could Be Leveraged Several Times to Support New Lending: While the Administration’s
proposal could provide $30 billion in capital to banks, these institutions would typically leverage
that funding several times over when increasing lending. As such, that $30 billion could
potentially support multiples of that amount in loans.
Incentive Structure Supports Immediate Increases in Lending Over 2009 Baseline: By reducing
the dividend on the capital investment that community and smaller banks receive, based on
increased lending over a baseline set using 2009 data, this program ensures that lenders have a
strong incentive to increase total loans to small businesses. Because banks would get credit for
any increase in lending during 2010, if they plan to join the program they should have an
New $30 Billion Small Business Lending Fund
Targeted at Community and Smaller Banks that Lend the Most to Small Businesses
Established Separately from TARP to Encourage Maximum Participation
Core Proposal for New Fund Would Be to Offer Capital Investments With Incentive for Banks to
Increase Small Business Lending
Administration Will Discuss with Congress Additional Ideas to Enhance Credit for Small Businesses
Through the Small Business Lending Fund New $30 Billion Small Business Lending Fund
Targeted at Community and Smaller Banks that Lend the Most to Small Businesses
Established Separately from TARP to Encourage Maximum Participation
Core Proposal for New Fund Would Be to Offer Capital Investments With Incentive for Banks to
Increase Small Business Lending
Administration Will Discuss with Congress Additional Ideas to Enhance Credit for Small Businesses
Through the Small Business Lending Fund
EMBARGOED UNTIL 6:00AM EST TUESDAY, FEBRUARY 2, 2010
incentive to increase lending immediately so they could realize the benefits of a lower dividend
rate on the investment as soon as they entered.
Administration Will Discuss with Congress Additional Ideas to Enhance Credit for Small Businesses
Through the Small Business Lending Fund. While the Administration is presenting its plan to provide
capital with an incentive structure to maximize small business lending, it looks forward to discussing
with Congress other ways that – in addition to what is described above – the Small Business Lending
Fund could be fully deployed.
Details of How the Core Proposal Could Work
The Administration’s core proposal would be to use the Small Business Lending Fund to offer capital
investments to community and smaller banks with an incentive structure to support new small business
lending, as described below. The Administration is open to other designs for the fund, and will discuss ideas
with Congress in the coming days and weeks.
One potential design for the proposal discussed above is the following:
Banks Would Be Eligible to Receive Up to 3% to 5% of Risk-Weighted Assets
Banks with less than $1 billion in assets would be eligible to receive capital investments up to 5%
of their risk-weighted assets.
Banks with between $1 and $10 billion in assets would be eligible to receive up to 3% of risk-
weighted assets.
To participate, banks would have to be approved by their primary federal regulator. Existing
Capital Purchase Program participants with less than $10 billion in assets would be permitted to
convert their capital to the new program.
The Cost of Capital Would Be Reduced As Lending Increases: The dividend rate for a capital investment
provided under the program would begin at 5%, but with reductions to as low as 1% if a bank
demonstrates increased small business lending relative to a baseline set in 2009.
Banks could receive a 1% point decrease in their dividend rate for every 2.5% increase in
incremental business lending they achieve over a two-year period, 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.
For purposes of the program, banks would be able to receive the incentive on the basis of new
lending beginning Jan. 1, 2010.
After five years, the dividend rate would be increased to encourage timely repayment.
Example
Bank A, with $500 million in risk-weighted assets, held $250 million in business loans the end of every
quarter of 2009. In 2010, it applies for and receives approval to draw capital equal to 5% of its risk-
weighted assets from the Small Business Lending Fund (the maximum allowable).
After drawing $25 million in capital from the fund, Bank A increased its stock of outstanding small
business loans to $275 million by the end of two years (a 10% increase over the baseline). As a result,
while it received capital with an initial dividend rate of 5%, that dividend rate would be decreased to 1%.
The 1% dividend would then be locked-in, and the bank would benefit from this attractive rate for the
following three years.
More info Here.
Updated 02-02-2010
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