Aug. 11 (Bloomberg) -- Regional and some smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans still on their books, the Congressional Oversight Panel said today in a monthly report.

The panel, which reports to lawmakers and was created to monitor the $700 billion Troubled Asset Relief Program, said the biggest U.S. banks appear prepared to handle more loan losses, particularly the 19 banks that regulators put through stress tests earlier this year. Banks with assets of $600 million to $100 billion may face bigger challenges, the panel said.

Banks of that size “will need to raise significantly more capital, as the estimated losses will outstrip the projected revenue and reserves,” the report said, citing its own loan analysis. The panel is led by Elizabeth Warren, a law professor at Harvard University.

“We haven’t really resolved this problem” of illiquid assets on bank balance sheets and “it’s more acute for the small banks,” she said in an interview on Bloomberg Television today. The panel “has repeatedly called for more stress tests” that apply more rigorous reviews of capital levels under adverse economic scenarios, she said.

The report said the Treasury and other regulators should do more to help smaller banks deal with whole loans on their books. The Treasury and the Federal Deposit Insurance Corp. program have shelved the Legacy Loans Program, intended to use a combination of public and private funds to buy loans from banks.

Legacy Loans

“Failure to start the Legacy Loan Program raises concerns about Treasury’s strategy,” the panel’s report said.

Representative Jeb Hensarling, a Texas Republican who also is a member of the panel, dissented from the report’s findings. He said the loss estimates may not be accurate and shouldn’t be used to justify another round of government assistance.

“It is possible that the toxic-asset market is already beginning to heal itself and the intervention proposed by the panel could be inappropriate -- if not counterproductive,” Hensarling said. “I am not necessarily discouraged by the results for the smaller banks since it is entirely possible that the input assumptions used by the panel were excessively pessimistic.”

Treasury Secretary Timothy Geithner pledged that the department remains a “hands-off” investor in banks and auto companies, according to a letter released as part of today’s report.

‘Reluctant Shareholder’

“With respect to Treasury’s relationship with financial institutions in which it holds a financial interest, Treasury is a reluctant shareholder,” Geithner said in a July 21 letter. “The government will not interfere with or exert control over day-to-day company operations and, in the event the government obtains ownership interests, it will only vote on core governance issues.”

The Treasury also told the panel it had no plans to extend a guarantee program for money market mutual funds that is scheduled to expire on Sept. 18. “The guarantee agreements do not provide for further extension of the guarantees,” the Treasury said in its comments.

Today’s report shows that the government is still grappling with banking-industry difficulties that prompted the TARP legislation, said Bill Mutterperl, a former vice chairman of PNC Financial Service Group Inc. who is now an attorney at Reed Smith LLP in New York.

“The conundrum which no one has been able to solve is the ability to price these assets at levels which would not require immediate devastating write-downs by banks but that would still be fair to the taxpayers,” he said.

Warren defended her panel’s decision not to release details of its working group meetings. “If we release transcripts of those, then we will be compromising the oversight process,” she said in the interview.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net;

Last Updated: August 11, 2009 16:40 EDT