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SBLF: Helping Those Who Need It Least?

Struggling banks haven't gotten much of a boost from the fund intended to stimulate small-business lending.
Barry HesterSeptember 26, 2011

Tomorrow marks the close of investment under the Small Business Lending Fund, a $30 billion account created last year by Congress to spur community banks to lend more to small businesses.  How successful has this effort been?

Best case, according to its own projections, the Treasury Dept. expects to invest only about $4.3 billion in 382 banks via the SBLF, or 14% of the original fund. While the agency had closed on only $2.4 billion as of its last report on September 14, I think it will get fairly close to its projected figure through a furious last wave of investment. This will continue in dramatic fashion the exponentially increasing pace of disbursement, from 4 closings in June to 39 in July, 87 in August, and as many as 252 in September.

This is not much to get excited about. In fact, another 550 institutions applied for $7.5 billion in funding and will not receive it, in large part because Treasury fixated on recipients’ current ability to pay dividends. In May of this year, nearly two weeks after the deadline for C corporations to apply for funding, Treasury added an eligibility condition that institutions must be able to pay dividends without the approval of third parties, including federal banking regulators. Effectively, the program door was open only to 1- and 2-rated banks with pristine asset quality.  

The institutions that have received funds to date were generally already flush with cash, and many have used funds for acquisitions and for paying off their Troubled Asset Relief Program (TARP) obligations. Their nonperforming assets as a percentage of total assets have been very low, 1% to 3% in general. Treasury can have little doubt that these entities will be able to repay SBLF investment, and although this lowers the program’s risk of bad press, its statutory purpose is to increase small-business lending by giving less-liquid community banks a boost. Many otherwise well-run banks continue efforts to, for example, mitigate the impact of pre-2008 real estate development lending on their overall health and could leverage Treasury investment today for that purpose.

As for TARP, about half of the recipients have used SBLF capital to redeem TARP funding, and these recipients have received 63% of the SBLF dollars invested thus far. Of the largest 25 investments by dollar amount, 21 have been used by their recipients to pay off TARP obligations, and those recipients have received on average $38 million to do so. 

Contrast that with 111 recipients that have received disbursements of $10 million or less: that’s 58% of recipients receiving 24% of the funding. Only a third of these small recipients have used their money to pay off TARP.  In sum, the program has been a boon for healthy TARP participants and for Pennsylvania (which has seen the most recipients, 16) and Illinois (which has seen the most investment, $173 million).

The reality is that many banks that could have put the money to use were disqualified from SBLF participation. And for many of the recipients, small-business lending remains limited by demand, not capital. Should Congress have just created a program of raw investment in struggling community banks analogous to TARP?  I don’t know, but I doubt the vision for this program was just to help larger, healthier community banks exit TARP and buy weaker banks. More important, will the program translate into small-business lending and job growth? Only time will tell.

Barry Hester is an attorney who concentrates in financial institutions and electronic payments at law firm Bryan Cave LLP.