Deficit reduction is on nearly everybody’s mind in Washington. With a soaring national debt and a third-straight year of trillion-dollar deficits, policymakers in Washington are keeping their eyes and ears open for spending cuts any way they can get them. One proposal came in mid-March from Senator Orrin Hatch (R-Utah): rescind $10 billion of currently unused funds from the Small Business Lending Fund (SBLF). The $30 billion fund is still sitting idle despite being signed into law last fall, so why not return some of those taxpayer dollars to the Treasury to reduce the debt? At a time of severe budgetary stress, that would be a smart and quick way to shrink the deficit. But with the SBLF’s continued implementation delays and, more importantly, the program’s significant design flaws, perhaps the full $30 billion ought to be on the chopping block.
The SBLF is a $30 billion fund set aside by the Treasury Department with the purpose of stimulating small business lending. Taxpayer dollars from the fund will be used to inject capital directly into community banks (traditionally the biggest source of financing for small businesses). In return, banks will pay a dividend to Treasury at a rate tied to their small business lending levels. The more a bank increases its lending to small businesses, the lower the rate on its funds. Treasury believes this sliding-scale rate will provide strong incentives to increase lending.
The problem with this approach is twofold.
First, it addresses the wrong problem at the wrong time. The president first proposed the SBLF in his State of the Union address in January 2010. Nearly a year and a half later, Treasury has yet to use a single dollar to actually help banks make loans. In the meantime, the approach became all but obsolete to an ever-changing, dynamic economy. The financial crisis has now largely passed and the SBLF fails to address the current challenges facing small businesses and the banks that lend to them.
Let’s look at the specifics. Treasury’s approach is to inject capital into the banks, but it doesn’t appear that lack of capital is the banks’ problem. Banks are sitting on one of the largest stockpiles of cash and excess reserves in history, but bankers have repeatedly reported that lackluster demand for loans leaves them with few opportunities to employ this capital profitably. Here we see the ripple effects of the recent recession: with continued economic uncertainty and depressed consumer spending, businesses remain reluctant to take on the credit risk of financing for new investments. In fact, surveys of small business owners confirm that only 31 percent of owners have reported regularly seeking credit to finance their businesses in recent months, near a record low. Until demand returns, loan growth will remain stagnant. As one community banker explained to a congressional panel over a year ago, “[Our bank] certainly has room to expand lending, given that we have [excellent capital ratios]…We would do more, but it is difficult to find anyone who has not been impacted and remains creditworthy.”
Small banks are just as likely to complain that over-zealous regulators — tightening their standards and ramping up oversight because they were embarrassed by their failure to prevent the last financial crisis — are getting in the way, consuming bankers’ time and resources, and preventing them from making what they believe are sound loans to creditworthy borrowers. At a recent hearing, a community banker from Ohio told a panel of senators that this increased oversight is a “huge disruption to business” and that it continues to “crush our ability to respond effectively, efficiently, and quickly” to customers’ needs.
Likewise, the program does little to help small businesses because it fails to tackle the most pressing problems they face in today’s economic environment. It is true that many small businesses continue to report difficulty obtaining credit, and lending certainly has not returned to its pre-crisis strength. But a litany of data suggest that credit conditions for small businesses have already begun easing over the last year, prior to a single SBLF dollar being spent.