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About that $30 Billion...

One more note on Obama’s plan to direct $30 billion in funds from the Troubled Asset Relief Program to community banks for small business lending. Making such a program work would require Congress to revise the TARP law, which might be a long-shot in this environment, according to Paul Merksi, chief economist at the Independent Community Bankers of America. The group represents community banks in Washington.

A plan to shutter the $700 billion TARP offered in the Senate last week gained 53 votes, Merski points out. (The amendment still failed to get the 60 it needed to pass.) “I’m not sure Congress is willing to allow new uses of TARP in this environment,” he says.

Without lawmakers amending the program, community banks will balk at taking the funds with their current restrictions. First, the capital is expensive. “You can’t get TARP capital at 13% [interest] and lend it out at 5%,” Merski says. Recipients also must give warrants to the Treasury that allow the government to buy stock in the banks. They face restrictions on the dividends they pay shareholders and limits on executive pay. These provisions were included to protect taxpayer money that was being shoveled at banks during the financial crisis. But now they stand in the way of using that capital to encourage lending at institutions that aren’t in acute distress.

Community banks won’t bite without lifting these requirements. Merski says that problem may grow during the recovery, as businesses need more credit to keep up with rising demand. “Right now the demand for small business loans itself is down,” he says, noting that companies are not hiring or replenishing inventory until demand picks up. “As the economy improves, I think the demand for small business lending may outstrip the supply.”

Opening $30 billion to community banks might shrink that gap — but only if Congress is willing to adjust the limits of the original TARP.

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