Politics

Is TARP Hurting Small Banks?

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Seems smaller banks that took TARP money aren't feeling so flush:

The Treasury Department's bailout program was designed with Wall Street megabanks in mind, according to a new watchdog report. The "one-size-fits-all" program may actually be hurting small banks that are struggling to repay the money or even deliver quarterly dividend payments, the report says.

Did the poor little bank break?

The main bank bailout program anticipated banks springing back from the crisis and raising fresh funds to repay the government, the report says.

That's exactly what happened to most of the big banks that took the most bailout money. Yet small banks continue to struggle, dragged down by souring loans for commercial real estate and high unemployment. Hundreds more small banks are expected to fail by the end of next year.

The 690 small banks that took bailout money are even worse off, according to a report Wednesday from the Congressional Oversight Panel, which monitors the $700 billion financial bailout. Already, one in seven has failed to pay a quarterly dividend due to Treasury. They can't afford the payments, which will nearly double in 2013.

…"There is very little evidence to suggest that the (bailouts) led small banks to increase lending," the report says.

In the end, that could mean that the biggest banks get even bigger, the report says. Dozens or hundreds of bailed-out banks could collapse or consolidate because they can't afford their obligations to taxpayers, it says. That would leave the handful of biggest banks with an even larger share of the banking system.

I'm a lot less worried about the potential for bank consolidation than, say, Elizabeth Warren (who can be seen fretting about the report elsewhere in the article). There's no correct size for banks, or correct distribution of large and small banks. But the Washington influence game, which bestows huge benefits on the dominant players in a market, means that government programs to "help" an industry frequently end up as government programs to benefit an industry's largest, most entrenched players. And that's why you end up in endless cycles of artificially distorted markets and politician-designed fixes that, in the end, only distort those markets more.

Lots more from Reason on TARP here.