Obama to unveil $30B in bailout funds for community banks

President Barack Obama on Tuesday will propose a $30 billion fund to encourage community banks to lend to small businesses.

Obama wants Congress to pass legislation that would move $30 billion from the $700 billion financial bailout program into a new fund to encourage lending. The additional capital could support several times the value of the fund, administration officials said.

{mosads}”These are the small, local banks that work most closely with our small businesses – that provide them their first loan, and watch them grow through good times and bad,” Obama will say in Nashua, N.H., where he will announce the new fund.

The program will be open to banks with at most $10 billion in assets and would represent a major lobbying win for the Independent Community Bankers of America (ICBA).

The new “Small Business Lending Fund” is the latest in a series of efforts that the White House is hoping to enact to bolster small business. Senior administration officials told reporters on Monday night that the White House would urge the Senate to act on the proposal as it considers additional fiscal stimulus measures early this year.

However, they said that the administration is planning several legislative proposal to boost the economy and that the exact timing of the bank proposal would need to be worked out with Congress.

Some Senate Democrats are skittish about using bailout money for new stimulus programs. Meanwhile, Republicans have lashed out at the prospect of recycling bailout money in a “slush fund”.

The administration and Congress have struggled with ways to increase lending to small business, with some banks citing weak demand as a reason for the low volume of loans.

The financial bailout program has helped stabilize the industry yet it has done little to boost bank lending, the Special Inspector General over the bailout said in a report released on Sunday.

Senior administration officials said they talked with industry associations and felt a new program separate from the bailout would encourage new lending.

The officials said that they had considered leaving the new program under the Troubled Asset Relief Program (TARP), as the bailout is known officially. Instead, the administration will propose a new program without TARP restrictions because community banks expressed concern about the “stigma” of participating in the bailout program, an administration official said.

Banks with less than $1 billion in assets would be able to receive capital worth up to 5 percent of their risk-weighted assets. Larger banks with at most $10 billion in assets would be able to receive capital worth up to 3 percent of their risk-weighted assets.

Banks would pay a dividend for the capital investment, but the government would reduce the dividend rate if banks demonstrate increased lending to small businesses relative to their 2009 loan volume.

Banks with $10 billion in assets or less that participated in the TARP program would be able to convert their capital into the new lending fund.

Administration officials said they consulted with, among others, Cam Fine, head of ICBA; Matthew Shay, president of the International Franchise Association; and, Michael Grant, president of the National Bankers Association.