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Holes in the TARP for Community Banks

by Chicago Agent

Community Banks are soaked in debt, and TARP funds are calling.

The Troubled Asset Relief  Program, or TARP, was a $750 billion infusion of cash into the U.S. financial sector, namely to banks addled by derivatives and other financial products. The largest recipients of TARP – Citibank, JPMorgan Chase, Wells Fargo – paid back their TARP funds in a timely manner, but new information reported by HousingWire suggests that is not the norm.

According to a new report from the Special Inspector General of TARP, 137 community banks received $2.2 billion in TARP funds – and they have yet to pay back the funds.

Worrisome to some analysts, notes HousingWire, is the nature of the TARP loans. Beginning in the fall of 2013, dividend rates for the funds will almost double from 5 percent to 9 percent, placing a new strain on banks already strapped for cash and creating fears of default. Of the 392 bank failures since 2008, 326 have been community banks.

The Inspector General’s report recommends that the Treasury re-commit to an exit plan for the community banks, opening lines of credit similar to what the larger institutions enjoy. In addition, the Treasury should restructure the bailout funds, rather than dissect them on a case-by-case basis that the report called “ad hoc and inconsistent.”

Christy Romero, the acting Inspector General, urged action from the Treasury in an interview with HousingWire.

“Something needs to happen. There needs to be some action taken right now,” Romero said. “Otherwise these small banks have no ability to raise capital. When the dividend increases, they will scramble to raise capital in the same time frame. That can flood the markets, and that will put more of these banks in jeopardy.”

The report did receive some push back from the Treasury. Tim Massad, the treasury assistant secretary, defended the performance of TARP, pointing out that 259 of the 303 banks that exited TARP were smaller institutions.

“We believe our overall approach recognizes that each bank’s situation is unique, and that such approach is better suited to fulfilling our statutory responsibilities than attempting to devise standard discounts or terms for all situations,” Massad said.

Massad added that there is no requirement to pay back TARP funds; it’s a voluntary effort by the banks that received the financing.

However, as HousingWire concluded, it’s definitely in the bank’s best interest to pay back the funds.

“But SIGTARP raised the point that as long as these TARP dollars are outstanding, recovery at these smaller firms will remain sluggish and lending in their local economies — vital for job growth — would remain constricted,” the report read.

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