Fed Blocking Use of Small Business Loan Fund, Banks Say

The Federal Reserve is blocking disbursement of money from a $30 billion government fund to spur lending to small businesses, endangering the program’s success, a trade group for community banks said.

The central bank, which regulates banks across the U.S., hasn’t allowed payment of dividends on the funds, jeopardizing approval of applications, Independent Community Bankers of America, which represents almost 5,000 institutions, said in an Aug. 10 letter to Fed Chairman Ben S. Bernanke. The Washington-based group released the letter regarding the Small Business Lending Fund to news media today.

The Fed has received the letter and will respond to it, said Barbara Hagenbaugh, a Fed spokeswoman. Treasury has given out $590 million of the amount authorized with less than two months until the Sept. 27 expiration of the program, the ICBA said. It was set up in September by Congress and the Obama administration to give capital injections to community banks that increase their lending to small businesses.

“Many applicants have reported that the Federal Reserve is simply refusing to address the dividend waivers, thus potentially neutering the success of the Treasury SBLF program,” ICBA President Camden Fine said in the letter. “We urge the Federal Reserve to help, not hinder, the SBLF approval process.”

Dividend Payments

Paul Merski, the ICBA’s chief economist, said in an interview that for Fed-regulated banks to gain access to the SBLF, the Fed must sign off on the institution’s payment of dividends on the funds to the government.

U.S. Treasury Secretary Timothy F. Geithner said in June that the Treasury Department received 869 applications for $11.6 billion in capital.

Geithner said at the time that regulators were responsible for the slow start of the Small Business Lending Fund. “The reason why we’re a little behind schedule is because we are being careful and because the regulators are being careful,” Geithner said at a House Small Business Committee hearing on June 22. “That’s what you want us to be.”

The program lets banks refinance debt from 2008’s Troubled Asset Relief Program. Treasury began distributing SBLF funding on July 7 by giving six community banks a total of $123 million in capital.