TARP Watchdog Says Closely Connected Banks Remain Financial Risk

Close relationships between large financial institutions remain a threat to economic stability nearly five years after the 2008 financial crisis, according to the watchdog for the U.S. government’s bailout program.

“Too big to fail is not just about size -- it is about the interconnections the largest financial firms have to each other and to American households,” the office of the special inspector general for the Troubled Asset Relief Program said in its quarterly report to Congress today. “Ending too big to fail is critical to the safety of our financial system.”

The debate in Washington over whether the Dodd-Frank financial overhaul law will end taxpayer-funded bailouts was re-energized after U.S. Attorney General Eric Holder said last month that the size of the largest banks has made it difficult for the Justice Department to bring criminal charges when there is wrongdoing.

Mary Miller, the Treasury Department’s undersecretary for domestic finance, said in a speech last week that the notion that some banks are too big to be allowed to fail is incorrect. “No financial institution, regardless of its size, will be bailed out by taxpayers again,” she said.

Banks with more than $500 billion in assets would face higher capital standards meant to reduce risk and end an implied subsidy for the biggest lenders under a bill to be introduced today by U.S. senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican.

Living Wills

Regulators should use so-called living wills to “prevent a future crisis and bailout,” Christy Romero, the special inspector general, or SIGTARP, said in a statement released with today’s report. Living wills are plans that would help regulators wind down a financial institution in case of future insolvency.

The report also said banks that left TARP through the Small Business Lending Fund, or SBLF, “have not effectively increased lending to small businesses, and are significantly underperforming compared to non-TARP banks in SBLF.” The program has been a “missed opportunity” to increase lending, it said. The Treasury program injects funds into banks for lending to small businesses.

The Treasury said in a March 28 letter to Romero that SBLF has been a success and banks in the program “have made significant progress in increasing small business lending.”

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