Smaller banks that got U.S. government bailout money are likely to run into trouble repaying it and may become vulnerable to takeovers as a result, a congressional watchdog agency warned on Wednesday.
In its latest critique of the Treasury Department's handling of the Troubled Asset Relief Program, or TARP, the Congressional Oversight Panel said smaller banks face far more difficulty than their big Wall Street counterparts in exiting the bailout program.
Treasury pumped about $205 billion of taxpayers' money into more than 700 banks through the Capital Purchase Program (CPP) that was created under TARP, aiming to stabilize them amid the financial crisis that struck in full force in autumn 2008.
Most of the money went to 17 big banks, with assets over $100 billion, that emerged from the crisis relatively well.
"Most of these large CPP banks have already repaid taxpayers, and many are now reporting record profits," the panel's report said. But many of the 690 smaller banks that got help are "are now struggling to meet their obligation to taxpayers."
Many smaller banks already are having difficulty raising capital necessary for repayment of their bailout funds, and by 2013 they face the prospect of having to pay higher charges for the bailout money that they received, the report said.
In a telephone conference call, panel chairman Elizabeth Warren said it was ironic that the government's bailout program seemed to be offering its greatest benefit to big Wall Street banks when it was intended to stabilize the whole industry.
"TARP was not intended as a bailout for Wall Street, it was intended to provide benefit for the whole economy," she said.
Banks that got bailout funds must pay a dividend to the government of 5 percent on preferred stock that they issued in return for the money, which is redeemed when they repay the funds. But that dividend rises to 9 percent in 2013.
"If they are unable to access new capital by the time the dividend rate increases, more small banks may become trapped, with no way either to escape the CPP or to repay their required dividends," the panel report said.
That might leave small banks as takeover targets, or force them to collapse.
"Consolidation or failure may be appropriate for some weak and poorly managed banks, but it would be unfortunate if well-run institutions were forced onto this path solely because of the CPP," the report said, adding that the effect of the bailout on smaller banks may be to weaken them.
The report warned that "the number of small banks that were once deemed healthy but that cannot make their dividend payment and repay their TARP obligations may grow," adding the end effect will be to pinch lending and dampen the recovery.
"One in seven small banks in the CPP has already missed a dividend payment, and fewer than 10 percent of CPP-recipient small banks have repaid taxpayers," the report said.
In response to questions, Warren expressed doubt that an Obama administration proposal for creating a $30 billion fund to boost capital at small banks, and so induce more lending, would offset the strains that smaller banks are already feeling.
"We are trying to wave a flag about a problem that's already serious and is very likely to get worse," Warren said, particularly because many smaller banks have significant exposure to commercial real estate markets where lenders are defaulting in growing numbers.
The panel suggests that Treasury consider setting up a workout team to help smaller banks negotiate deals to raise capital and move quickly to exercise its shareholder rights, like appointing board members at banks where dividend payments have been missed to try to ensure taxpayers are repaid.
Treasury spokesman Mark Paustenbach disputed the findings, saying in a statement that the bailouts helped many of the banks "weather the storm and continue to extend credit in the economy."
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