Big Banks Could Be Cut Out of Next TARP Deal

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The U.S. Treasury Department reportedly has a new draft on the table for more TARP loans — but there’s a wrinkle. First in line would be small banks, who the government wants to see spread some credit around to small businesses.

The driver for redirecting federal government bailout money comes from the pen of Sen. Carl Levin. The Michigan Democrat wrote a letter in late December urging the Treasury to help smaller community banks stay afloat — and to the stronger small banks who can use the money to float credit to local small businesses.

According to a study from the U.S. Small Business Administration's Office of Advocacy, small companies historically fare poorly when it comes to getting credit during tough economic times. Says the SBA: “Small businesses may be particularly exposed to recessions, banking conditions, and monetary policy. Small firms typically rely more for their credit on bank lending than larger firms do and may be more adversely affected when tighter monetary policies or a deterioration in bank health reduce the supply of bank loans.”

That sentiment was certainly born out during the Great Recession. According to a report released by the Treasury in December, big banks reduced their business loan balances by $1 billion in October alone. From April to December of last year, overall small-business lending fell back by 11.6%, the Treasury says. It’s likely worse, as the big banks, most of who took TARP money, only began reporting their business lending balance sheets to the government last April.

The Treasury Dept. also reports that of the large financial firms who received $100 billion or more in Troubled Asset Relief Program (TARP) money, only 22% of overall small-business lending came from those banks.

That’s where Sen. Levin is coming from, and the U.S. Treasury, if it ever pushes for a TARP II, would likely go along in delivering money to smaller community banks.

“In the wake of the worst financial crisis we have seen in decades, we need strong and immediate support for these vital community lending institutions in order to resume the flow of credit, which is desperately needed for economic recovery,” said Levin in a letter to Treasury Secretary Tim Geithner.

“I have heard from countless creditworthy businesses in Michigan that are having tremendous difficulty procuring a loan, getting their loans renewed, or are facing prohibitively high rates during already difficult economic times,” he said. “On the other side of that equation, I have heard from smaller lending institutions that, although willing to lend, are being told by their regulators to pull back or cease their lending.

Word from Washington is that the White House is backing Levin on the call for more financial help for smaller banks. Both the Obama administration and the Treasury have plans on the drawing board to spur government lending to smaller businesses — via smaller community banks.

Since bigger banks didn’t play ball like Washington wanted, why not give smaller banks a chance to get in the game? That’s the line of thought for an increasing number of key government decision makers — with Levin leading the charge.

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