Bailout Benefits Elude Struggling Smaller Banks: Report

The U.S. Treasury made it tougher for small banks to benefit from its bailout program, applying a “one-size-fits-all” approach that will make it difficult or impossible for these struggling banks to repay taxpayers, according to a watchdog report released today.

The Congressional Oversight Panel, which oversees the $700 billion Troubled Asset Relief Program (TARP), the government’s umbrella bailout vehicle, concluded that bailouts have done little to bolster the small bank sector, which is vital to re-establishing a pre-crisis flow of credit to small businesses and households.

“So long as small banks remain weak, their lending to customers – especially to small businesses – will remain constricted and will have a dampening effect on any economic recovery,” the panel’s report said.

Of the 19 U.S. banks with more than $100 billion in assets, 17 took part in TARP’s Capital Purchase Program, CPP, to prop up the banking sector. The big banks received 81 percent of the total CPP funds. Most of these large banks have already repaid their bailout funds, and many are now reporting record profits.

Of the 7,891 banks with assets of less than $100 billion, only 690 received funds from the CPP, the panel said.

“Those banks experienced a much longer and more stringent evaluation, and many are now struggling to meet their obligations to the taxpayers,” the report said.

The Oversight Panel said small banks have disadvantages when compared to larger competitors, such as being disproportionately exposed to commercial real estate, where future losses are likely. Small banks are often privately held or thinly traded, and have limited access to capital markets.

Despite these differences, “Treasury provided CPP capital under only a single set of repayment terms. This ‘one-size-fits-all’ approach appears to have suited large banks much better than their smaller counterparts,” the report said.

Treasury’s terms included strong incentives for banks to repay taxpayers by exiting the CPP within a five-year period.

However, smaller banks “may find it difficult or impossible to raise the capital necessary for repayment,” the panel said. Some banks are already having difficulty making their dividend payments, it said.

“In the end, there is little evidence that the CPP has strengthened the small bank sector,” the report said. “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.”

Read the July report from the Congressional Oversight Panel.