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CAPITAL: President’s Small Biz Lending Program Reintroduces Leverage
There are many interesting wrinkles to President Obama’s $30 billion small business lending program, but one of the more fascinating aspects of the reallocation of TARP funds is that it allows for something all but shunned upon in banking over the last few years: leverage.
The Obama plan makes clear that it intends for the $30 billion to be leveraged up, and it is encouraging banks to do so. In the language of the White House:
Capital Could Be Leveraged Several Times to Support New Lending: While the Administration’s proposal could provide $30 billion in capital to banks, these institutions would typically leverage that funding several times over when increasing lending. As such, that $30 billion could potentially support multiples of that amount in loans.
I don’t know what kind of leverage such banks can get on these funds, but just the fact that the White House is pushing leverage is interesting.
The White House is also proposing that the program’s capital costs decline as the banks make more loans. Think of it as a volume discount. Here’s how it would work:
o The dividend rate for a capital investment provided under the program would begin at 5%, but with reductions to as low as 1% if a bank demonstrates increased small business lending relative to a baseline set in 2009.
o Banks could receive a 1% point decrease in their dividend rate for every 2.5% increase in incremental business lending they achieve over a two-year period, down to a minimum dividend rate of 1%.
o Banks would realize this reduction in dividend rate sooner if they make early, but consistent progress towards increased lending.
o For purposes of the program, banks would be able to receive the incentive on the basis of new lending beginning Jan. 1, 2010.
o After five years, the dividend rate would be increased to encourage timely repayment.
Whether Congress goes for this is another discussion entirely.
Download the White House’s fact sheet on the program here.
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