Wall Street Journal: U.S. Government Programs Have Yet to Boost Small Business Lending

f t # e
Washington, D.C., May 13, 2010 | comments

By Meen Thiruvengadam; Wall Street Journal

U.S. efforts to stabilize the financial system have done little to boost small business lending and it remains unclear what impact the Obama administration's latest lending push will have, a report released Thursday said.

The report from the Congressional Oversight Panel, which oversees the government's $700 billion financial sector bailout, said it's not sure "whether Treasury's programs can or will play a major role in putting small businesses on the path to growth."

The report did note that Treasury's efforts thus far haven't resulted in an increase in loans to small businesses.

In 2008 and 2009, large banks that received government bailouts actually cut lending to small businesses. At the 22 largest banks to receive government bailouts, for example, average small business loan balances fell 4.6% between April and November of 2009, the report said. Meanwhile, originations for new loans slid by 7.4%, according to the report.

"Big banks pulled back on everyone, but they pulled back harder on small businesses," said Elizabeth Warren, the panel's chair.

Still, she noted that with the recession has come a dip in demand for loans to small businesses and a reduction in the number of small businesses deemed creditworthy.

"Nobody knows whether lending is constrained more by a lack or lenders or borrowers," she said.

That is just one factor clouding the future of the Obama administration's latest push to increase small business lending.

Obama earlier this month sent a proposal to Congress to create a $30 billion fund that would provide capital to banks with assets under $10 billion. The idea is that those banks would then make loans to small businesses, earning discounts on dividend payments if lending is increased by a certain level.

Banks, for example, would pay the government dividends of 5% if they increase small business lending by less than 2.5%. A bank that increases lending by 7.5% or more would pay just 2% in dividends or interest.

Still, even that incentive to lend may not be enough to get credit flowing to American small businesses. "The small business lending fund takes for granted that lending is frozen because lenders don't have money to lend," Warren said.

f t # e