• Congressional Oversight Panel Evaluates TARP's Impact on the Small Business Credit Crunch
  • May 20, 2010
  • Law Firm: Alston Bird LLP - Atlanta Office
  • Today, the Congressional Oversight Panel, which was formed to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds, released its May oversight report, “The Small Business Credit Crunch and the Impact of the TARP.” The report concludes that, although the TARP has launched several initiatives aimed at restoring general credit availability, there is little evidence that these initiatives have stimulated small business lending. 

    The Panel found that while the largest TARP program, the Capital Purchase Program (CPP), provided hundreds of billions of dollars in new capital to banks, the Treasury did not require recipients to use the money to improve credit access.  As such, small business credit remains severely constricted. Data from the Federal Reserve shows that lending plummeted during the 2008 financial crisis and remained sharply restricted throughout 2009.  The small business lending portfolios of Wall Street banks fell by 9% between 2008 and 2009.

    Further, the Panel concludes that TARP has done little to restore stability to the smaller banks that provide the bulk of small business credit.  With Wall Street banks lending less to small businesses, these small businesses have looked to community banks for liquidity.  Many community banks, however, have constrained lending ability given their commercial real estate loan exposure.

    Moreover, the report expressed concern that Treasury’s proposed new lending program for small banks, even if enacted by Congress, could have only limited access.  The Small Business Lending Fund (SBLF) as outlined by President Obama in February proposes to transfer $30 billion in capital from the TARP program to provide low cost capital to small and mid-sized banks.  The Panel noted, however, that the SBLF requires legislative approval and “could arrive too late to contribute meaningfully to economic recovery.”  Further, banks may avoid accepting funds from the program either out of fear that being stigmatized from its relation to TARP or for fear of taking on more liabilities when their assets, such as commercial real estate, are still troubled. 

    Finally, the Panel warned that “[t]o the extent that contraction in small business lending reflects a shortfall of demand rather than of supply, any supply-side solution will fail to gain traction.”  The Panel encouraged Treasury to take active steps to gather more detailed and dependable data about small business lending to determine whether small business lending is being constrained by supply or demand.  The Panel further urged that Treasury, being mindful that the contraction in small business lending could be due to a short fall in demand, should “consider creative solutions that engage banks, state-based lending consortia, and other market participants”