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TARP casts cloud over Small Business Lending Fund
(Editor’s note: This is the second installment in a series of stories examining the proposed creation of the Small Business Lending Fund.)
One local community banker is cautiously optimistic about the proposed Small Business Lending Fund, while another has no intention of participating in the federal offering if it becomes a reality.
Both expressed reluctance about the program, though, because of its similarity to a highly criticized earlier endeavor.
President Barack Obama has proposed taking the $30 billion that has been returned by some of the nation’s largest banks from the contentious Troubled Asset Relief Program and investing those funds in the SBLF. In turn, those dollars would be made available to community banks with assets under $10 billion — about 8,000 in number — to provide capital for small businesses. The hope is the funds would create jobs and help turn the nation’s economy around.
“Well, I think we’re going to be cautiously optimistic. As you realize, not all of the details are out yet. It’s just been kind of a trial balloon that has been floated,” said David Blossey, president and CEO of Grand River Bank, which opened last June.
“From what we’ve heard, it appears like it’s something that would be a positive. Getting capital to community banks certainly is a positive thing because most community banks have had trouble accessing the capital markets. So I think that, in itself, is a good thing,” he added.
If SBLF does go forward and Grand River Bank is chosen as a participant, Blossey said his bank would welcome the additional capital and would use it to make loans to meet its lending demand. But Blossey also said most bankers in his position are a “little wary” of the program due to the controversy that has unfolded from the TARP, a $700 billion “bailout” effort that gave tax dollars to some of the nation’s largest financial institutions as the Bush administration’s first response to a collapsing capital market.
Art Johnson has followed the proposal closely, too, both in his capacity as United Bank of Michigan chairman and president and as chair of the American Bankers Association. Johnson said while he thinks the Obama administration is “trying very hard to do the right thing” he didn’t think the SBLF would matter much to United Bank, which has a lengthy history of lending to small businesses.
“First of all, our bank doesn’t need any capital to meet what we perceive as the real loan demand locally right now. We’re one of the banks in this market that has operated profitably last year, the year before, the year before that and the year before that — not at quite the same level that we would like, but profitable nonetheless,” he said.
“Our losses have been substantially lower on loans than many of the other banks in town. Actually, our commercial lenders, our small business lenders, are quite busy right now talking to people who are primarily looking to refinance from other banks,” he added.
Johnson said the actual demand for loans is lower than what the general public believes. To support his statement, he pointed to the outstanding lines of credit currently held by major banks. He said that credit line is usually about 65 percent full in a normal economy, but today the number is under 40 percent.
“So that means that loan demand for ongoing operations is substantially down from normal levels. While banks like mine would not be included in that data, it is suggestive of what the general loan demand is nationwide,” said Johnson.
“And I think it’s also fair to say on that kind of a measure, if anything Michigan would be lower than the national average, just in general, because unemployment is higher here than elsewhere.
“We like to see the administration talking about programs to encourage small business lending. But to be perfectly honest, it wouldn’t be something that would be necessary for us to avail ourselves.”
One good element that Johnson found in the SBLF program is that it reportedly would have fewer strings attached to it than the similar Capital Purchase Program, which also targeted smaller banks as part of the TARP. But even so, the ill will that came from TARP lingers with some community banking officials and has cast a dubious cloud over the SBLF.
“The fact of the matter is, when the CPP program was initially rolled out as part of TARP, there were lots of banks that were encouraged to participate by really being told it was the patriotic thing to do, and then the deal changed. Certainly, those banks who participated in that program heretofore have received a lot of scorn from the Congress, the administration and the public,” said Johnson.
“I think many community banks including ours, if we were so inclined, would be understandably reluctant to participate in a program that looks an awful like the original TARP program. And the money is certainly coming from there. Is that a distinction the public would make? I’m not sure.”
The Michigan Association of Community Banks supports the SBLF’s creation, a move that Congress has to take. The association is based in East Lansing and represents 110 banks. Grand River Bank is a member, as are Select Bank, Mercantile Bank and Founders Bank & Trust in Grand Rapids. Other area members are Firstbank in Ionia, West Michigan Community Bank in Hudsonville and Community Shores Bank in Muskegon.
Next week: Credit unions are unhappy about their exclusion from the SBLF proposal.