NCPA - National Center for Policy Analysis

Funds for Small Businesses Used to Repay Bank Bailout

October 7, 2011

More than half of $4 billion in federal funds disbursed this year to spur small-business lending by community banks was used to repay bailout funds that the banks received under the government's Troubled Asset Relief Program (TARP), says the Wall Street Journal.

The Small Business Lending Fund was meant to raise capital at smaller banks, which tend to lend more heavily to small businesses, in the hopes of jumpstarting growth and employment.  But instead of directly lending to small businesses, many of the banks used the money to rid themselves of higher cost TARP debt and tougher restrictions.

  • Of 332 banks that received cash through the lending fund, 137 used at least a portion -- totaling $2.2 billion -- to pay off their TARP obligations.
  • The fund began lending to small banks three months ago, and the program concluded last week.
  • Of the total $30 billion available in the fund, only $4 billion in loans to banks were approved.

Under the fund's regulations, the banks weren't prohibited from using the money to pay back TARP debt.  But the two programs were designed to be separate, a Treasury Department spokeswoman said, adding that unless the banks increased their small-business lending, they wouldn't enjoy loan rates lower than what they were paying for TARP money.

Source: Emily Maltby and Angus Loten, "Tale of Two Loan Programs," Wall Street Journal, October 6, 2011.

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