In a recent address to a conference of community bankers, U.S. Treasury Secretary Timothy Geithner invited them to participate in the federal government’s Troubled Asset Relief Program (“TARP”). Geithner’s stated reason for offering TARP funds to community banks, those with less than $500 million in assets, was to expand the pool of capital available to underwrite small business loans. Expanding access to capital for small businesses is one of the stated reasons that the federal government is offering the bailouts to large financial institutions. I wonder whether the government is sincere in this effort, and fails to appreciate the unintended consequences of its policy decisions, or if this is cynical pandering to the small business constituency.
Consider the idea of including community banks, which have generally been friendlier to small business borrowers than the big banks receiving TARP funds. Last fall, when certain banks were rumored to be takeover targets, small business owners transferred their accounts to other banks perceived to be more stable. While the protection of the Federal Deposit Insurance Corporation would make depositors of failed institutions whole, the relief is not instantaneous. Customers of the failed IndyMac, for example, had to wait several days or longer than a week for reimbursement. Many small business owners, out of an abundance of caution, transferred their accounts out of IndyMac upon hearing the concerns of Senator Charles Schumer (D-N.Y) of the Senate Banking Committee.
The reason is simple: small businesses cannot weather the disruption in their cash flow if they have funds tied up in a failed bank. Small businesses generally cannot defer their obligations. Laws vary from state to state, but generally employees must be paid their salaries within two weeks of their having performed the work. Failure to meet this obligation is one of the few instances in which the corporate veil can be pierced and the small business owner exposed to personal liability. In addition, small business owners often have to provide personal guarantees for many of their commitments. If small business owners continue to behave as they have in the past, they will likely withdraw accounts from TARP-participating banks. It would be a shame if community banks, which have been pillars of small business support, failed to appreciate the consequences of public perceptions of TARP and institutional stability.