TARP Has Left Smaller Lenders Behind, And Americans Are Paying Heavy Price

Op-Ed

The Hill

It has now been just over one year since the collapse of Lehman Brothers caused a stock market crash that pushed a global recession into a full-blown economic calamity. In the immediate aftermath of the financial crisis, some institutions were deemed too big to fail and the government acted quickly to save them. Economists now believe that the economy is showing signs of recovery, and many of these large financial institutions are repaying the Troubled Asset Relief Program (TARP) funds that kept them solvent during the crisis.

While the picture for these large institutions looks much better now than it did a year ago, many community banks and other smaller financial institutions are still struggling to raise capital and keep their heads above water. There have been 94 bank failures so far this year, and hundreds more around the country are at a high risk of insolvency. While there is no doubt that some of these institutions are paying the price for poor management and risky investments, many well-run banks are fighting to survive because of the economic environment.

For example, many banks in my home state of Michigan are struggling due to declining property values caused by the huge numbers of job losses we have suffered.

As the unemployment rate in the city of Pontiac has gone from 6.4 percent in 2000 to 35 percent today, the median home price has dropped from $104,000 to just $10,000. For small banks operating under these economic conditions, new sources of capital are hard to come by.
The one readily available source of capital that does exist is TARP funds, but relatively few small financial institutions have been able to utilize this assistance. I believe that the Department of Treasury should look closely at using TARP in new ways to assist banks that can demonstrate they have sound management and a plan to survive the economic downturn but have not been able to raise sufficient private capital. For example, rather than limiting TARP assistance to only those institutions that can show they would be viable without it, Treasury should consider allowing an institution to establish that it could leverage TARP funds to obtain private investment and obtain viability. Protecting taxpayers' investment is paramount, but providing assistance to financial institutions that are struggling to find capital would be more beneficial to the economy than FDIC seizure.

Some have expressed concerns that acting to provide assistance to struggling banks is unfair to healthy ones, forcing them to compete with weaker institutions that might otherwise fail. However, community banks' toughest competition increasingly does not come from other small institutions but from the same handful of large banks that already received government assistance. Three of the nation's largest banks each now hold more than 10 percent of the nation's deposits, and four institutions issue half of all mortgages and two thirds of all credit cards. Applying equity arguments now that the largest banks have used government support to strengthen their competitive position approaches absurdity.

While the worst of this economic crisis may now be behind us, Americans across the country continue to struggle with unemployment, and businesses continue to suffer from a lack of lending. Real recovery will not come until job creation is back on track, and having a strong network of lenders in our communities is critical to achieving that.

Peters is a member of the House Financial Services Committee.

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