The Effectiveness of the Small Business Lending Fund (SBLF) Program During the 2007–2010 Financial Crisis

This paper examines the effectiveness of a specific U.S. Treasury program, known as the Small Business Lending Fund (SBLF), that is designed to stimulate small financial institutions to make more small businesses loans. Three hypotheses are examined to identify the success of the SBLF program. The first hypothesis deals with the asset growth of small banks that participated in the SBLF program. The regression results show that a $1 increase in SBLF funding contributed to a $49.5 increase in a bank's total assets and that the total assets increased by $0.6 per each $1 increase in the baseline business loan, net of the SBLF funding effect. The second hypothesis looks at the loan growth of small banks. The loan growth was positively related with the SBLF funding and banks' total assets, but negatively with the dividend rates. In fact, it is inferred that a 1% decrease in the dividend rate charged by the U.S. Treasury may increase the small business loans by $11.5 million to $13.5 million. The third and last hypothesis examines the factors that determine the dividend rates that small banks paid. Because the marginal impact of the owner-occupied commercial real estate loans in reducing the dividend rate is greater than that of the commercial and industrial loans, it shows a strong incentive to the SBLF-borrowing banks to make more owner-occupied commercial real estate loans than any other types of loans. In conclusion, if the dividend rates paid by the small banks to the U.S. Treasury were lower, the loan and asset growth of the small banks would be faster and larger, possibly contributing positively to the faster economic recovery in the U.S.