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Smaller Banks Could Need More TARP Money

By , Money Morning •

Troubled assets are still plaguing the U.S. financial system, and a recent report from the Congressional Oversight Panel concluded some smaller banks may need additional $12 billion to $14 billion in funds from the Troubled Asset Relief Program (TARP) and may need a stress test of their own.

According to data compiled by Bloomberg News, more than 150 publicly traded U.S. banks have nonperforming loans that account for 5% or more of their total assets. Almost 300 banks showed troubled assets accounted for 3% or more of their holdings.

Some smaller, lesser-known banks, like Michigan-based Flagstar Bancorp Inc. (NYSE: FBC), which said in its second-quarter filing with the Securities and Exchange Commission it was considered to be "well capitalized" and are not subject to regulatory capital requirements actually have troubled assets that exceed 10%, Bloomberg said.

"At a 3% level, I'd be concerned that there's some underlying issue, and if they're at 5%, chances are regulators have them classified as being in unsafe and unsound condition," Walter Mix, former commissioner of the California Department of Financial Institutions and now a managing director at consulting firm LECG Corp. (Nasdaq: XPRT) told Bloomberg.

Three lenders with nonaccruing ratios of 6.2% as of March closed earlier this month: Corus Bankshares Inc. (Nasdaq: CORS), Guaranty Financial Group Inc. (NYSE: GFG) and Colonial BancGroup Inc. (NYSE: CNB).   

Although financial market conditions have shown signs of life in the last month, the Congressional Oversight Panel's latest monthly report said there is a continuing uncertainty on how much the troubled assets are actually worth and could again trigger more instability.

"No one has a good handle how much is out there," panel chairwoman Elizabeth Warren told Reuters Television in an interview. "Here we are 10 months into this crisis...and we can't tell you what the dollar value is."

A panel study showed that under a scenario 20% worse than assumptions used by the U.S. Federal Reserve's stress tests, roughly 719 banks with assets between $600 million and $100 billion would need to raise about $21 billion in new capital to offset loan losses from mounting real estate and credit card defaults.

The panel's report comes as the Treasury is still trying to get its Public-Private Investment Program, initially announced in March, off the ground. Initially revealed as a program with $75 billion to $100 billion in debt guarantees, the program has been scaled back to $30 billion.

The report was approved by the panel in a 4-to-1 vote, with the dissenting vote being U.S. Rep. Jeb Hensarling, R-Tex, the committee's only sitting congressman.

"Although there is no assurance that any of these alternatives will offer definitive solutions, it is clear that most of the proposals will require taxpayers to fund significant amounts either to purchase distressed loans and securities or prop-up problematic financial institutions," Hensarling said in an addendum to the report, adding that the Fed should continue to monitor the troubled asset market.

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