WASHINGTON – Should economic growth continue to stagnate, small banks could find themselves trapped in the government's bailout program and unable to boost lending, an oversight panel said in a report Wednesday.
That would have a "dampening effect on any economic recovery," the Congressional Oversight Panel, led by Harvard Law professor Elizabeth Warren, wrote in its latest monthly report.
While many of the larger banks receiving bailout funds through the Troubled Asset Relief Program, known as TARP, have repaid their loans, most smaller banks have not and could face rising dividends in the coming years. The Treasury invested in hundreds of smaller banks through the nearly $700 billion TARP and has almost $25 billion in loans outstanding to small banks.
Initially, the TARP provided "a capital cushion that helped large banks weather the financial crisis and, in some cases, purchase smaller banks. Now small banks continue to struggle and TARP provides little relief," the panel wrote.
The Treasury argued "TARP is still providing relief to those that took it." The money is helping small banks "weather the storm and continue to extend credit in the economy," spokesman Mark Paustenbach said. Still, fewer than one in ten small banks has repaid a TARP loan, and in 2013 those banks remaining in the program will see their quarterly dividend payments rise to 9% from 5%.
"They are at risk of becoming stuck," Warren said. "The problem will grow worse in a few years when the dividend rate increases." That could leave banks in a situation where they are "forced to downsize or merge in order to pay off their investments," the panel said.
The panel's report notes that small banks are continuing to struggle against a weak economy, a troubled commercial real estate sector and limited access to capital markets. That's making it hard for them to repay the Treasury, which maintains it has established procedures to prevent such occurrences. However, the panel said "in practice, these safeguards appear to have been insufficient."
One in seven small banks already has missed at least one dividend payment, the panel said. The number of banks missing dividend payments has been growing and stood at 91 as of May 17, Treasury's latest dividend payment date. "As the small banking sector continues to struggle, the number of small banks that were once deemed healthy but that cannot make their dividend payments and repay their TARP obligations may grow," the panel wrote.