SBA says that bank bailout didn’t help small business lending

November 15, 2012 at 10:59 am

The Small Business Administration issued a report looking at the effect of the Troubled Asset Relief Program (TARP) on small business lending. TARP, also known as the bank bailout, was the program in which the U.S. Department of the Treasury purchased assets of the banks and other financial institutions that were hit by the financial crisis in 2008. It allowed Treasury to purchase up to $700 billion of these “troubled assets.” One of the goals of TARP was to help banks get to pre-recession lending levels.

Banks have reduced their small  business lending, and accessing capital has become a significant challenge for many entrepreneurs. According to the SBA’s analysis, conducted by Rebel A. Cole, a professor at DePaul University in Chicago, lending to small firms declined almost 18 percent from June 2008 to June 2011. The banks that received the most in TARP assistance have reduced their lending and, four years later, continue to pull back from small  business lending:

The author compared business lending by banks that received TARP funds (Troubled Assets Relief Program) and those that did not, and found that the decline in bank lending was far more severe to small businesses than to larger firms. For example total commercial & industrial (C&I) lending declined by 18 percent for large firms versus 20 percent for small firms. Among banks participating in TARP, the decline was even greater; small C&I lending declined by 31 percent and only 10 percent at non-TARP banks over the 2008–2011 period.

The chart below shows the rise in small business lending volume between 1994 and 2008. Though there was an overall decline between 2008 and 2011, the TARP banks (the green line) saw a much sharper drop than non-TARP banks (the red line). The report also points out that banks that received TARP funds have continued to allocate less of their assets to small business lending, while the non-TARP banks have actually increased their assets dedicated to small business lending.

The report also found a negative correlation between bank size and small business lending, but a positive correlation between “de novo” banks, or those that are younger than 5 years, and small business lending.

Responses to the report point out the flaws in the conclusions drawn by the author, particularly that it’s no surprise that TARP didn’t work to increase lending at the big banks. Some say that this was never a reasonable outcome or goal to begin with. But either way, the SBA’s report makes an important point about how we responded to the financial crisis. Rather than bailing out the big banks with a stop-gap measure, perhaps it would have been better to enact systemic policy changes that would have created a healthier and more responsible banking system overall.

TARP did what it was supposed to do– it saved the biggest banks from failing completely. But it did not address some of the root problems that brought about the recession in the first place, nor did it help to ease access to capital for the small businesses that create jobs and generate economic growth at the local level. Stephen Gandel of the CNN Money blog sums it up well:

A well structured bailout would have done something not just to save the banks, but to clean them up so that our banking system was healthier than before the bailout, and not the limping along mess it has become. That’s the real sign that the bailout perhaps not failed but certainly could have been much, much better.


Entry filed under: Banking, Banks, Economic Development, Economy, Small Business. Tags: , , .

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