Public Funds Spent on Bailout Debt Instead of Small Business Loans

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A new government watchdog report says community banks used money intended for small business loans to pay back their federal bailout debts instead.

The conclusions were released by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) in a report titled, “Banks that Used the Small Business Lending Fund to Exit TARP (PDF).”  The report says community banks did not properly use the money they received through the Small Business Lending Fund (SBLF).

The SBLF was created in 2010 and funded with $30 billion by the U.S. Congress. The money was to be distributed to community banks to stimulate small business lending. The SBLF was intended to address a lack of investment in the small business sector by the initial Troubled Asset Relief Program (TARP).

While the U.S. Department of the Treasury only ever invested $4 billion of the $30 billion Congress made available, the report shows $2.1 billion of that money was applied to TARP debts, not small business lending. The money helped 137 banks exit TARP in 2011.

“Former TARP banks in SBLF have not effectively increased small business lending and are significantly underperforming compared to non-TARP banks,” SIGTARP Special Inspector General Christy Romero wrote in the report.

Specifically, 24 former TARP banks did not increase lending whatsoever. The remaining former TARP banks only increased lending by $1.13 for every dollar in SBLF funds they received. Non-TARP banks receiving SBLF funds lent, on average, $3.45 for every dollar in SBLF funding.

The report blames a lack of communication between the Treasury and banking regulators for mismanagement of the funds. Specifically, the report summarizes that both Treasury and federal bank regulators failed to assess whether required lending plans submitted by banks to receive the funds were achievable. They also did not monitor to determine whether banks were prepared to lend the SBLF funding to small businesses as intended.

The report concluded the TARP banks had much to gain and little to lose by taking the SBLF funding. The funding provided the opportunity to pay off the TARP debt with no meaningful penalty for failure to increase lending.

Bailout Money Photo via Shutterstock

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Joshua Sophy - Staff Writer


Joshua Sophy Joshua Sophy is a staff writer for Small Business Trends, covering technology and business news. He is a journalist and editor with 15 years experience in media. A former newspaper reporter and editor, Joshua also serves as President of the Board of Directors of a curling club and is editor of a regional newsletter focused on the sport of curling in the Eastern U.S.

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