WASHINGTON — Details for a planned $30 billion program to help community banks lend to small businesses are still being worked on, but the Obama administration is leaning toward removing the strings that have scared institutions away from other capital programs.
The plan is designed to help banks with assets of less than $10 billion funnel Troubled Asset Relief Program funds to small businesses. Banks that did would pay only a tiny dividend to the government.
Importantly, they would not face any of the restrictions in previous Tarp initiatives, including executive compensation limits or warrants.
The plan, which would require congressional approval, could succeed where previous efforts have failed, observers said, by removing the stigma on applying for Tarp funds.
"It sounds like they are really trying to do something that has a chance of working," said Robert Clarke, a senior partner at Bracewell & Giuliani LLP.
Sources cautioned, however, that getting this through Congress may be difficult. What's more, bankers may not trust that the program's terms will not change in the future.
President Obama unveiled the program during his State of the Union address Wednesday, saying that he wants to "take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat."
While the Treasury Department is relatively free to use the remaining funds it has in Tarp to fund new bank programs, the law creating the program insisted on certain strings being attached, including requiring banks to provide warrants to the government. The Tarp legislation also allowed Congress and the administration to retroactively apply restrictions to banks that received government funds.
In order to entice banks to participate in a new program, those restrictions would need to be eliminated, sources said.
Yet some lawmakers were already balking at the idea. Sen. Mike Crapo, R-Ind., said in an interview after Obama's speech that Tarp was not passed to spur lending. He said the money left in the fund should instead be used to reduce the federal deficit.
"I like the idea of some small-business incentives, but … those dollars were intended to go back to the Treasury and to pay down some of the debt that was incurred to create some of those funds," he said. "So while I like the idea, the source of funding is not the right source."
The administration appears to be considering multiple approaches to a small-business lending program. Under one idea, banks with assets of less than $1 billion could borrow up to 5% of their risk-weighted assets, paying a 5% dividend that would be reduced if they could prove they increased their small-business lending. Banks with assets of $1 billion to $10 billion would be able to borrow up to 3% of risk-weighted assets.
The administration is also weighing whether to let institutions that already took Tarp money refinance into the new program.
Community bankers sounded wary, but hopeful.
"At first blush, it looks very enticing, but again, the devil's in the details," said Cynthia L. Blankenship, vice chairman and chief operating officer of Bank of the West in Grapevine, Texas, and a past chairman of the Independent Community Bankers of America.
But she warned the administration must craft the program effectively. Limiting loan terms to five years, which the administration is also considering, would eliminate many small-business borrowers who are often looking for longer-term funding.
"There will be a niche for this type of lending through this program, but it will be constricted, at least on the banks' part, because they'll have to consider that this funding matures in five years," Blankenship said.
But Art Johnson, the CEO of United Bank Michigan and the chairman of the American Bankers Association, said once-burned community banks are unlikely to want anything to do with Tarp funds.
"Frankly, we are understandably a little gun-shy after the Tarp program, because the deal changed from when it first came out to the kind of treatment that Tarp recipient banks are receiving now," Johnson said. "They're being demonized and yet at the beginning, many banks were encouraged to participate, because it was the patriotic thing to do."
He said a better solution would be to funnel the $30 billion through the Small Business Administration. "It's going to take time to invent something new, [and] it's going to take effort to convince banks that there aren't many strings."
Thomas O'Brien, the president and chief executive of the $1.6 billion-asset State Bancorp Inc. in Jericho, N.Y., agreed. "In terms of participating in a government program voluntarily, I think you would have to be crazy to do it," he said. "They demonized the industry up and down, from the money-center banks on down."
If Congress really does drop the strings attached to past Tarp initiatives, including warrants, that could change some minds, some industry observers said.
A looming question: What is the demand for small-business loans? Though bankers have argued demand is soft, a survey released Thursday by the Main Street Alliance, which represents small-business owners in 15 states, found that 15% were denied credit by their existing lenders at least once since June 2008.
Despite the challenges facing the program, some bankers were hopeful it would be enacted — and said it would likely succeed.
"I think it will go through Congress, I really do," said Rusty Cloutier, another former ICBA chairman who runs MidSouth Bank in Lafayette, La. "Funding and capital is not easy to raise, and certainly I think every bank in America is going to look at it."