Industry Market Trends

Banks Used Small-Business Funds to Pay Off Bailouts

Apr 24, 2013

A recent inquiry by a government watchdog agency found that of the $4 billion disbursed by the federal government for smaller banks to increase small business lending, well over half was used by the banks to repay their federal TARP obligations instead of providing loans to small businesses.

A recent report from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), titled "Banks that Used the Small Business Lending Fund to Exit TARP," revealed that banks receiving government funds under the Small Business Lending Fund (SBLF) used $2.1 billion of the $4 billion fund to repay high-interest government bailout funds obtained under TARP.

The purpose of the SBLF, created by Congress in 2010, was "to encourage banks with less than $10 billion in assets to expand their lending to small businesses," according to the Associated Press. At that time, small businesses were having difficulty obtaining funding, and the loan program charged the community banks lower interest rates if they used the money for loans to small businesses.

The report found that 332 banks participated in SBLF. Of those, 137 banks had TARP obligations to repay. Those 137 banks received a total of $2.7 billion under SBLF, and used $2.1 billion of it to repay their TARP obligations, increasing small-business lending by $1.13 for every government dollar received. Twenty-four of the banks didn't increase small-business lending at all.

Banks participating in SBLF who did not have TARP obligations to repay received a total of $1.3 billion, and increased their small-business lending to $3.45 for every dollar received from the government. The report calculated that in total 80 percent of the funds given by SBLF to banks with TARP obligations were used to repay their bailouts.

Specifically, "TARP banks that received only enough SBLF funds to repay TARP have lent out significantly less than they received in SBLF funds - increasing lending by only 25 cents for each dollar in SBLF funds. TARP banks that received additional SBLF money beyond the outstanding TARP balance have increased lending by $1.67 for every dollar in SBLF funds."

In other words, funds were used first to pay off TARP bailouts, then considered for use as small-business loans.

Some in the banking industry said those banks looking for a way to get rid of the high-interest TARP loans entered SBLF specifically to get low-interest financing to pay off their obligations. Cliff McCauley, a senior executive vice president at Frost Bank in San Antonio, told CNN Money that he had "steered clear" of both programs, adding that "Everyone went in [SBLF] thinking it was one of the ways to pay back TARP. It was disguised as promoting to encourage business lending."

Banks bailed out by TARP were repaying the money at interest rates ranging from 5 to 9 percent. SBLF funds could be repaid at 1 percent interest. For many banks, exploiting the lower rate seemed like an appealing options because they "were desperately looking for ways to pay back the expensive government bailout funds, especially at a time when the economy had just emerged from a recession and was barely limping along," CNN Money noted.

Congress initially appropriated $30 billion for the SBLF, but only $4 billion of those funds were ever used. The report also explained that former TARP banks that received money from SBLF but failed to increase lending won't be penalized for their actions.

The report criticized the quality of government oversight for the SBLF program, particularly for banks with TARP obligations. Although the findings note that Congress did require participating banks submit to submit a small-business lending plan, the Treasury Department, the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency "did not adequately assess whether the banks' plans to increase small-business lending were achievable."

The report also warned that U.S. Treasury and federal banking regulators "did not effectively communicate with each other, each claiming that the other had responsibility to assess the banks' lending plans."

In fact, the Treasury Dept.'s SBLF program director "told SIGTARP that Treasury did not perform an independent analysis of the projections in the lending plans," claiming that such an analysis "was the regulators' responsibility." SIGTARP added that regulators "did not agree with Treasury's view."