White House Hopes To Increase Small Business Lending

A new government program that would lend $30 billion to community banks, including incentives to boost small-business lending, is currently being finalized by the Obama administration, in hopes to trigger a faster economic recovery.

The Wall Street Journal reports that under one leading version of the program, the government would allow banks with less than $1 billion in assets to borrow an amount equal to 5% of their assets from the government. These banks would have to pay the government a 5% dividend on the loan, but that dividend would be reduced to as little as 1% if the banks substantially increased their lending to businesses. Banks with between $1 billion and $10 billion in assets (there are currently 7,500 banks that fit into this category) would be able to borrow up to 3% of their assets from the new program.

The plan would essentially use leftover money from the Troubled Asset Relief Program (TARP) to allow banks to tap the government funds with fewer strings attached than the initial program created in 2008. Banks that already have TARP funds would be able to essentially refinance into the new program.

The program’s goal is to encourage banks to make more business loans by lowering the dividend requirement. Small businesses have complained that their access to credit has dried up in the wake of the financial crisis. The new plan could require congressional approval, because it would potentially change the requirements banks face when they receive money from the government.