Smaller Banks Seek TARP Funds To Avoid Banking Failure

Small Banks Line Up For TARP Money – No End In Sight

The banking crisis may or may not be over for the nation’s largest banking institutions, but many smaller banks, desperate for capital are lining up for TARP funds.  As the recession continues and asset values backing loans continue to erode, smaller banks are finding it impossible to raise private capital to bolster their balance sheets and are turning to the last resort option of government bailouts.

The Wall Street Journal is reporting that Small Banks Not Shying From TARP.

In contrast to Wall Street firms like J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and American Express Co. that returned $68.25 billion in one day this month to escape TARP and all the strings that were attached, a steady stream of small banks still is lining up for government money.

Since May 31, 20 small banks have received a total of $164.1 million in taxpayer-funded capital, according to the Treasury’s latest available figures. Half of those banks got the money in the same week that 10 big financial institutions gave theirs back.

Analysts see no end in sight to the trend. The recession and borrowers are squeezing most of the 8,200 federally insured commercial banks and savings institutions in the U.S., so even a dollop of TARP funds could make a difference.

Overall, 633 U.S. banks have received a total of $199.57 billion in TARP money, according to the Treasury. Of the 32 banks to repay a combined $70.12 billion to the government so far, about 20 are small institutions.

Investors have bid up stock prices of the larger banks based on the successful results of the stress tests and new capital infusions.  However, many smaller banks will continue to struggle as their loan delinquencies increases.  Former Federal Reserve Chairman, Alan Greenspan, recently noted that until the slide in residential real estate ends, the banking industry will continue to face mounting losses.   Plummeting home values certainly contribute to mortgage defaults, but smaller banks also face the problem of increasing delinquencies on all major loan categories – see latest Quarterly Banking Profile. Ultimately, until the economy stabilizes and job losses end, expect to see more stressed out banks requesting TARP funding.