US plan to revive SME lending

The Obama administration's new plan to revive small business lending would reduce the cost of government capital for small banks as they make more loans, US Treasury Secretary Timothy Geithner said on Tuesday.

"We're trying to create strong positive incentives to lend in support of growing businesses," Geithner told reporters in a conference call. "The more loans these banks make to these business customers, the better deal they are going to get."

The programme, which proposes carving out $30 billion (Dh110bn) from repaid bank bailout funds, aims to provide new incentives for small business loans and eliminate the stigma and restrictions that caused many smaller banks to shun the Troubled Asset Relief Programme (Tarp).

Under the plan, which requires approval by Congress, banks would pay a five per cent dividend on the government capital they receive from the proposed Small Business Lending Fund – the same as the initial Tarp rate – and this would decline to as low 1 percent as funds are loaned out. They would receive a one-percentage-point decrease in their dividend rate for every 2.5 per cent increase in incremental business lending demonstrated over a two-year period.

Banks could receive funds equivalent to three per cent to five per cent of their risk-weighted assets under the programmes, depending on their size.

The programme also would allow banks with less than $10bn in assets that currently have Tarp funds to convert that capital to the new programme. This would immediately lower their funding costs on loans already made with Tarp money, assuming they have increased lending above a certain baseline.

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