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Revive the Treasury’s Small Business Lending Fund

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The economic shock waves of the coronavirus pandemic continue to decimate small businesses across the nation, but ready access to capital can help limit the fallout.

There is growing fear that banks will shelter their capital in place, pulling back on new lending. While the Paycheck Protection Program has provided a short-term bridge, more sustainable policies will be required. One proven approach worth pursuing: a renewal of the Treasury Department’s Small Business Lending Fund.

In the aftermath of the 2008 financial crisis, the SBLF program sought to forge a unique public-private partnership between the government and community banks. These banks were then, and remain today, the largest lenders to small businesses, fostering deep relationships within their local markets.

The SBLF program provided hundreds of these institutions with new capital to make small business loans, coupled with a compelling economic incentive to take action — the more a bank increased its small-business lending, the less it would pay for the capital.

This proved to be a powerful combination. In the years that followed, SBLF participants grew their small-business loan portfolios by nearly $19 billion, representing a median increase of 92% over their initial levels and more than 77,000 new loans to small businesses.

By contrast, similar banks that did not participate increased lending by a median of just 26% in the same period. The resulting benefits were widespread across businesses — nearly 80% of the small-business loans made by SBLF participants were for amounts of $250,000 or less.

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Moreover, Treasury showed itself to be a capable investor in these institutions. Of the $4 billion invested through the program, just 1% was written down. The government earned millions of dollars in dividends and interest payments. And while initial budget projections suggested the program would cost over $1 billion, recent figures indicate that taxpayers will in fact earn a profit.

A reauthorized SBLF program would be even more relevant today. During the program’s initial funding round in 2011, some banks perceived that the nascent recovery’s slow-but-steady pace would constrain their potential loan growth and opted not to join.

Other institutions lacked the baseline capital and portfolio health that were a prerequisite to participate. These situations have since reversed.

Most institutions today are in solid financial condition and would be well qualified to participate. Similarly, while the timeline for the coronavirus crisis is yet unknown, many lenders would agree that demand for credit will increase substantially as businesses seek to reboot their operations.

More immediately, access to capital through SBLF funding would help bolster banks’ confidence to continue extending credit as this crisis unfolds. With bank equity valuations down 40% this year, fortifying community bank balance sheets with new SBLF capital would offer a strong inoculation against fears of dilutive capital raises.

Beyond its partnership with community banks, an often-overlooked component of the SBLF program was its $100 million investment in over 50 high-impact community development loan funds.

These nonprofit organizations provide credit to small firms and microbusinesses that are generally unable to secure bank financing. It is borrowers like these that have been hit hardest by the current crisis. Demand for capital from community development funds is now reaching a crescendo, even as their resources are increasingly stretched.

In public forums, the SBLF program was sometimes conflated with the Troubled Asset Relief Program because both efforts provided capital to banks, although the two initiatives were separate and the similarities were largely superficial.

The TARP bank capital program focused principally on capital injections to support banks’ existing operations, and most banks returned the funding as quickly as they could. The SBLF program, by contrast, sought to partner with banks that were in sound condition but needed additional capital to finance a growing loan portfolio.

It was an effective approach — more than 90% of SBLF participants grew their small-business loan books, and fully 85% recorded increases of 10% or more. Participants also retained their SBLF capital for more than four years on average, evidence of the program’s continuing value.

While some economic recovery programs will take considerable time to implement, a second round of SBLF capital could be fielded in relatively short order.

The program’s infrastructure was built to be readily deployable, drawing upon turnkey departmental capabilities and shared services. These mechanisms functioned well — in an independent survey, 89% of SBLF participants reported they were satisfied with the Treasury’s administration of the program.

There are several paths to a reauthorization of SBLF funding. The most direct would be a reopening of the investment window specified in the Small Business Jobs Act of 2010, the bill that created the program.

It may also be possible to employ a portion of the $454 billion in economic stabilization funding authorized by the CARES Act to the same end, absent additional legislation.

To be sure, some adjustments would be warranted in any subsequent funding round. Banks organized as Subchapter S corporations and mutual organizations should be permitted to include new SBLF funding in their Tier 1 capital, thereby facilitating their full participation in the program.

Regulators would be asked to offer limited exemptions from more recent Basel III directives that could impede the SBLF’s capital structure. Also worthwhile would be a recalibration of the program’s incentive thresholds and pricing for the present environment.

Small businesses have been pressed by the coronavirus crisis like no other. Access to capital has rarely been so crucial for these firms as it is today. The resulting need for time-tested policies that can deliver credit quickly and at reasonable cost is immense and escalating. The SBLF program worked well the first time. It would be even more effective today.

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Small business lending Small business Community banking SBLF SBA Treasury Department
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