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Small U.S. Banks May Struggle Under TARP, Oversight Panel Says

Small U.S. banks that took money from the Troubled Asset Relief Program may struggle under the weight of their repayment obligations, said a watchdog group led by Harvard University law professor Elizabeth Warren.

The Treasury Department may be stuck for some time with stakes in banks that can’t raise replacement capital, the Congressional Oversight Panel said. Banks that can’t repay their TARP capital by 2013 will see their dividend payment grow to 9 percent from the current 5 percent rate.

“If they are unable to access new capital by the time the dividend rate increases, more small banks may become trapped,” the report said. “A growing number could default on their obligations to taxpayers, be forced to consolidate, or collapse completely.”

Warren said the Treasury needs to work “aggressively” to help small banks and encourage lending to small businesses. She said small banks have not benefited as much from TARP as larger counterparts that received the bulk of the funds and were able to exit sooner. Among the larger banks to receive funds were Citigroup Inc. and Bank of America Corp.

The panel recommended that the Treasury clarify its exit strategy and also develop a policy for how to handle banks that miss six or more dividend payments and trigger a provision that lets the government replace board members. The Treasury Department injected about $205 billion in capital into 707 banks, including 690 with assets of less than $100 billion, the report said.

Late Payments

So far, about 10 percent of the participating smaller banks have repaid taxpayers, and another 15 percent are late on at least one dividend payment, the report said. One small bank has missed six dividend payments, and another eight have missed five consecutive quarterly payments.

Treasury Department spokesman Mark Paustenbach said TARP is “still providing relief” to participating small banks. He said there have been four failures of small banks that accepted capital injections, or 0.6 percent of banks that took TARP funds. Out of all U.S. banks, 2.9 percent have failed since the end of 2007, he said.

Treasury Secretary Timothy F. Geithner said last month that the capital injections for small banks were designed to help them weather the economic crisis. The Treasury will work with the banks to give them alternatives to slashing lending in a way that would harm the recovery, he told Warren’s panel in a June 22 hearing.

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