Obama: $30B to aid small businesses

Continuing his focus on jobs, President Obama on Tuesday will introduce a plan to take $30 billion from the Wall Street bailout fund to create a new program encouraging community banks to lend to cash-strapped small businesses.

The proposal, which Mr. Obama is set to unveil at a town hall event in Nashua, N.H., is the latest in a series of policies aiming to spur job growth by easing the burden of the recession on start-ups and smaller firms. It is sure to draw fire from Republicans on Capitol Hill, who have argued that any leftover money from the Troubled Asset Relief Program should be used to pay down the deficit.

Citing the disproportionate impact of credit freeze on small business, the White House wants to give banks with fewer than $10 billion in assets a discount that would prompt them to boost lending to small businesses in exchange for lower dividend rates.

“These are the small, local banks that work most closely with our small businesses — that provide them their first loan, and watch them grow through good times and bad,” Mr. Obama will tell the crowd, according to excerpts of his speech provided by the White House.

“Combined with my proposal back in December to continue waiving fees and increasing guarantees for SBA-backed loans, this will help small banks do even more of what our economy needs — ensure that small businesses are once again the engine of job growth in America.”

The proposal comes on the heels of a tax credit Mr. Obama unveiled Friday that would reward businesses that hire new workers or give existing employees a raise. Mr. Obama has also called for eliminating the small gains tax on small business investments and continuing a stimulus policy that allows them to expense certain equipment purchases. Like those plans, the program would need to be approved by Congress.

The Small Business Lending Fund would cover some 8,000 small and community banks that may have been eligible for TARP funds but opted against taking the money for fear of the strings that were attached or the stigma of accepting a bailout, senior administration officials said. It would not include TARP-like restrictions.

Banks with less than $1 billion in assets would be eligible to receive capital investments from the Treasury Department of up to 5 percent of their risk-weighted assets, and banks with assets between $1 billion and $10 billion could receive funds totaling 3 percent of risk-weighted assets. For every 2.5 percent increase in small business lending over a two-year period, participating banks would receive a 1-percent decrease in the dividend rate they have to pay to Treasury.

Dividend rates for banks under the fund would start at 5 percent but could dip to as low as 1 percent. Banks that increase lending sooner could take advantage of lower dividend rates sooner.

“We give [banks] an incentive not to herd or hoard the capital, but to increase their small business lending,” a senior administration official said.

According to an example given by the White House, a bank with $500 million in risk-weighted assets that holds $250 million in business loans at the end of 2009 could see its dividend rate fall to 1 percent at the end of two years if it used a $25 million government injection to boost small business lending to $275 million at the end of two years. The bank could take advantage of the discount for three years.