Small Banks Using Government Money to Repay Government Loans

Almost of all of the nation’s big banks have repaid the government bailout loans they received under the TARP program. In fact, the Treasury reports that it has loaned out $245 billion under the Capital Purchase Program (CPP), a main component of the TARP plan, and it has now been returned $255 billion in repayments, netting a $10 billion taxpayer profit.

And here’s some more good news – a number of small banks are starting to repay their government loans as well. These are U.S. banks who took out smaller loans but have had a harder time earning the money back to repay them, until now. And here’s where the not-so-good news comes in. Most of these smaller banks are using money from the Small Business Lending Fund, another government program, to pay off their loans.

As an article on the Yahoo Finance blog reports, there were eight banks that repaid their funds in full on July 14. Yet each of these small banks used money they got from the SBLF, money technically meant to encourage more lending.

The SBLF was instituted in the fall of 2010 to stimulate more lending to small businesses around the country. Banks with no more than $10 billion in assets were allowed to participate, getting low-interest rate loans in exchange for beefing up their small business lending percentages. Here’s how the rewards work, according to that same Yahoo piece:

“If a bank’s small business lending increases by 10 percent or more, then the rate [on the SBLF capital loan] will fall to as low as 1 percent. Banks that increase their lending by amounts less than 10 percent can benefit from rates set between 2 percent and 4 percent.”

So, these banks have paid off their 5 percent TARP loans with 1percent SBLF loan money, a great savings for them, but not much of a payout for taxpayers. And some of these banks are using a sizeable amount of their SBLF funds on these repayments. One bank, First California Financial, actually used all of its SBLF money to repay its TARP debts. Several others used around 70 percent of their loans for the same purpose. That means less of that money is going towards increasing small business loans and the many banks are no closer to weaning themselves off of government assistance.