FACTBOX-Obama seeks $30 bln from TARP for small business loans

WASHINGTON, Feb 2 (BestGrowthStock) – President Barack Obama on
Tuesday proposed carving $30 billion from a controversial
taxpayer-financed bank bailout fund to boost lending through
small and community banks to small businesses.

The Small Business Lending Fund would require approval from
the U.S. Congress. The following are some details of how
Obama’s plan, which would use money from the government’s
Troubled Asset Relief Program, known as TARP, would work:

WHAT IS IT ABOUT

– Freeing up capital on potentially attractive rates for
small U.S. banks and severing it from the stigma attached to
TARP by getting Congress to create a new vehicle that is free
of the onerous restrictions on things like executive pay and
bonuses that lawmakers placed on TARP funds.

WHY DO IT?

– U.S. unemployment is 10 percent and small businesses
represent a powerful force for employment. But they say credit
is tough to find, hindering their ability to expand and hire.

– Banks say the country’s severe recession has damaged the
credit quality of many potential borrowers.

– Regulators are also clamping down, forcing banks to write
down the value of loans, particularly on commercial real
estate, denting banks’ capital and their ability to lend.

– The Small Business Lending Fund, which is among a number
of ideas percolating on Capitol Hill, was previewed by Obama
last week in the State of the Union address as a way to beat
the credit crunch and kick-start hiring.

HOW MUCH CAPITAL?

– Banks with less than $1 billion in assets would be
eligible to receive capital investments up to 5 percent of
their risk-weighted assets.

– Banks with between $1 billion and $10 billion in assets
would be eligible to receive up to 3 percent of risk-weighted
assets.

– Banks would have to be approved by their primary federal
regulator. Banks that have already received capital under TARP
and have less than $10 billion in assets can convert their
capital to the new program, shedding TARP’s sharp restrictions
on pay and bonuses.

COST OF CAPITAL AND INCENTIVES TO LEND

– The cost of the capital would start at 5 percent in terms
of the dividend a bank pays to the government. But this would
decline as a bank increased its small business lending, falling
by a percentage point for every 2.5 percent rise in incremental
lending, to a minimum dividend of 1 percent.

– Banks get the dividend cut sooner if they make early and
consistent progress toward increased lending.

– Banks can receive the incentive on the basis of new
lending, beginning Jan. 1, 2010.

– After five years, the dividend rate would be increased to
encourage timely repayment.

Money

(Reporting by Alister Bull; Editing by Jan Paschal)

FACTBOX-Obama seeks $30 bln from TARP for small business loans