Plan for small banks is facing tough battle

WASHINGTON – Small-town banker Marc Green in rural Georgia is enthusiastic that the White House proposal to help community banks lend to small businesses could pump tens of thousands of dollars into his bank and enable him to turn that money around to local enterprises.

“One of the challenges in the community bank market right now is raising capital,” said Green, president of Mountain Valley Community Bank in Cleveland, Ga., a rural bank with $145 million in assets.

“The big banks were able to raise additional capital to pay the government back. That same capital is not available to community banks. There are a lot of community banks that can come out of this if they can get a fresh injection of capital,” Green said.

President Barack Obama last week proposed to allocate $30 billion of bank bailout funds to small banks to stimulate lending to small businesses.

Community bankers have generally applauded the move, but, nevertheless, the proposal is generating a backlash on Capitol Hill as key Democratic lawmakers seek ways to gain its passage despite Republican opposition.

“I think, so far, it has a 50-50 chance of being approved,” said Independent Community Bankers of America Vice President Chris Cole, a major advocate of the possible program.

The proposal would allow banks with $1 billion or less in assets to borrow from the government up to 5 percent of their risk-weighted assets. (Banks with between $1 billion and $10 billion could borrow 3 percent.) These smaller financial institutions would receive investments from the financial rescue Troubled Asset Relief Program that must be used for small business lending. However, the measure needs approval from Congress to be put into effect.

Based on the program, a bank with $100 million in assets could borrow $5 million in funds from the government while an institution with $1 billion in assets could take on $50 million to fund small business loans.

The TARP investment would come with a 5 percent dividend to Treasury, which could be reduced by 1 percent – to as low as 1 percent – for each 2.5 percent increase in small business lending conducted by the bank. Community banks that have already accepted TARP funds – as roughly 500 have – could convert to this program.

As an additional incentive, the Obama proposal would eliminate the executive compensation restrictions and costly warrants that came attached with the original TARP program, prospects that would likely encourage small banks to participate.

Finally, small banks already participating in the TARP program – roughly 500 community banks have already accepted bank bailout funds – could convert their government stakes to the small business initiative.

Lawmakers are debating whether to include the proposal in broad bank reform legislation that is likely to be delayed on Capitol Hill, or job creation legislation that is expected to be approved more quickly.

Sen. Robert Casey, D-Pa., said the $30 billion program is a great idea. However, he argues that if it were packaged as part of broader job creation legislation that includes tax credits for small businesses it would have a greater chance of passage than if it were a free-standing bill or packaged with bank reform legislation.

“It (the bill) shouldn’t be too big,” Casey said. “It should be very targeted and strategic, but a bill to create jobs in 2010 is something that I think can pass quickly and create jobs quickly.”

On the House side, the House Financial Services Committee and House Small Business panel are planning a joint hearing on the subject of what to do to help small businesses. The program is expected to come up.

Meanwhile, Republicans are opposed to the prospect of spending more TARP funds for small businesses or any other reason.

“It’s a really, really bad idea,” said Sen. Bob Corker, R-Tenn., a member of the banking panel.

“TARP was used for systemic risk; it should be used to pay down the deficit. It breaches the trust and that was not what the program was created for.”

Sen. Orrin Hatch spokeswoman Antonia Ferrier said the Utah senator has problems with the proposal, arguing that TARP should be used to pay down the deficit and not for additional programs. Along with Sen. Chuck Schumer, D-N.Y., Hatch introduced legislation that would provide tax incentives to an employer that hires someone who is unemployed for at least 60 days.

House Minority Leader John Boehner, R-Ohio, also said he was opposed to the plan, arguing that “more government spending isn’t what small businesses need.”

Nevertheless, Democratic lawmakers are moving forward. A spokeswoman for House Majority Leader Steny Hoyer, D-Md., said lawmakers are discussing possible legislative vehicles for the program.

“The president’s plan responds to a pressing need, which Congress has heard repeatedly from constituents: Small businesses are still struggling to get credit, which hampers their ability to expand and hire new workers,” Hoyer said.