No TARP exit strategy for community banks

10/28/2011

The Troubled Asset Relief Program, launched by the Bush administration in 2008, was a $700 billion rescue plan intended to strengthen the country's financial sector by purchasing assets and equity from banks.

According to the Wall Street Journal, the U.S. Treasury only ended up investing a little more than $204 billion TARP funds into 707 financial institutions - $142 billion of which were designated to the country's 10 largest banks.

Three years later, those institutions have been able to provide full repayment. However, 137 other banks replaced TARP funds with Small Business Lending Funds, and community banks' ability to pay the government back remains a significant issue.

"A common misconception is that most of the 707 TARP banks have paid back TARP, when really only the largest banks have exited TARP," government watchdog The Special Inspector General of the Troubled Asset Relief Program (SIGTARP), said in a recently released quarterly report to Congress. "Despite the dramatic efforts to expedite the largest banks' exit from TARP, there appears to be no corresponding concrete plan for community banks' exit from TARP."

In order to expedite this, the report states the Treasury "should develop criteria for restructurings, exchanges and sales of its TARP investments," and provide factors for calculating discounts so institutions know what they have left to pay off.

Approximately 400 smaller banks have yet to repay their TARP loans. This accounts for around $20 billion of the more than $200 billion which was lent out. These financial institutions cite the depressed real estate market, bad loans and limited access to capital as barriers to repayment.

Furthermore, if the banks are unable to return the bailout money by fall of 2013, the Treasury Department will raise dividends from 5 to 9 percent, which may severely limit their access to new capital.

"A growing number [of community banks] could default on their obligations to taxpayers, be forced to consolidate on very unfavorable terms or even possibly fail," Christie Romero, acting special inspector general for TARP, said in a letter to the Treasury Department as quoted by the news source.

Thus far, 193 banks have missed dividend payments - 72 of which have missed six or more, while 20 have passed on at least five.

However, the Treasury has provided some peace of mind for banks.

"We continue to explore the best ways to manage our remaining investments in order to promote financial stability and maximize taxpayer recovery," said assistant secretary for financial stability Tim Massad, as quoted by the media outlet.

The SBLF is seen as the best - and only - option for relief thus far. The program, which had intended to funnel $30 billion to banks to spur small business lending, was by all intents and purposes a failure, approving only around $4 billion applications, Money News reports. Furthermore, it was later determined that around half of those funds were used by banks to pay back TARP instead of lend to small companies.

"It was basically a bailout for 100-plus banks," said Giovanni Coratolo, vice president of small business policy at the U.S. Chamber of Commerce, as quoted by the media outlet. "From a point of view of a small business owner, it was very ineffective in getting funds out to small business."

Specifically, 137 of the 332 banks that received SBLF money used it for TARP repayment, totaling around $2.2 billion.

Globe St. notes that after the "strongest" nine banks paid off their TARP obligations, Treasury Department regulators issued $1 in new common equity for every $2 in TARP money repaid, figuring the move would speed up recovery.