President Barack Obama wants to provide community banks with $30 billion to spur lending to small businesses, but local banks might not want or need to take it. Obama's plan, which he announced on Feb. 2 at a speech in Nashua, NH, proposes to take $30 billion of the money that was repaid by Wall Street banks and use it to create a new Small Business Lending Fund. This fund will provide capital for community banks on Main Street.

Obama said: "These are the small, local banks that work most closely with our small businesses - that provide them their first loan, and watch them grow through good times and bad. The more loans these banks provide to creditworthy small businesses, the better a deal we'll give them on capital from this fund.

But figures from the Independent Community Bankers Association (ICBA), the primary lobbying group for the nation’s 8,000 smaller banks, show that community banks are the ones that are still lending, despite the credit crunch. According to ICBA, institutions with less than $1 billion in assets hold only 12 percent of all bank assets, but have made 40 percent of the small business loans outstanding. Big banks — those with $100 billion or more in assets — made only 22 percent of such loans.

Karen Thomas, senior executive vice president for government relations and public policy at ICBA, said that while many banks will want to take the money, there are many banks that will not want or need to. She said: "Lending from community banks has held up well. Since first quarter 2008, community banks with less than $1 billion in assets have average quarterly loan growth of +3.9% compared to an industry average of -4.4%."

Michael Jones, executive vice president, COO and CFO of the Institution for Savings, said that his bank is one of those that won't be taking any money from the fund. Jones said: "It is not something that we will get involved with. We are in one of the better capitalized positions in the state.  We have enough money to lend and we are interested in lending."

Critics said that the Small Business Lending Fund plan is too closely associated with the tainted troubled asset relief program (TARP), and that most small banks do not want or need the help.

The Institution's Jones cautioned: "It is hard to believe that the fund won't be perceived as TARP. It is also hard to believe that there won't be additional restrictions placed on the banks that take the money in the future."

Thomas agrees that the money must be perceived as being divorced from TARP in order to avoid the TARP taint. ICBA is strongly supportive of the new program, saying that it would help small businesses fuel local job creation and economic stability.

Jones wonders if the banks that do take the money may behave differently than they normally would as a result. "They might take more risk in their loan portfolios, for example. Lending to borrowers that they hadn't lent to before. They could let their guard down a little bit."

He also questions whether there are adequate tools in place with which to monitor the banks' usage of fund money.

NH Sen. Judd Gregg accused the administration of using a "gimmick" by announcing yesterday that it would finance the plan through repaid TARP funds.

According to press reports from the speech Gregg said: "On the day that you're telling us that you're going to be fiscally responsible, you're proposing language which is going to spend $30 billion of TARP money, which specifically was supposed to be used to pay down the debt."

Some banks have not had the time to look at the proposals in depth. Marc MacBurnie, executive vice president at the Newburyport Five Cents Savings Bank, said it is too soon to tell whether his bank will want to take advantage of the new stimulus.

MacBurnie said: "At this time it is simply too premature to comment as this lending proposal is in its very early stage of development.  We have received some basic information from our national trade groups; however, the final details are still forthcoming."

Banks with assets from $1 billion to $10 billion could borrow as much as 3 percent of their risk-weighted assets, while banks with less than $1 billion in assets would get up to 5 percent of their holdings.