Under TARP, the Treasury Department provided funds to financial institutions after the Wall Street crash in 2008 and the Federal Reserve Board required some banks to undergo stress tests to ensure they were strong enough to stay in business.
Banks wanting to pay back the bailout and exit the program originally faced stringent requirements, according to the IG report.
But some banks protested the “stigma” associated with TARP.
Ultimately, bank regulators began to relax the rules for banks to exit the program, according to the report, “bowing at least in part to a desire to ramp back the government’s stake in financial institutions,” as well as “pressure by institutions seeking a swift TARP exit.”
Acting Special Inspector General for the TARP program Christy Romero told the Federal Drive with Tom Temin and Amy Morris that just as large banks were rushed into the TARP program, the banks put pressure on the regulators to leave it.
“And what we found is that the federal banking regulators really did bow to that pressure as well as pressure to ramp back the government’s ownership in these financial institutions,” Romero said.
So what did the report find as the end result of this rush to the exits?
First, if the federal banking regulators had stuck to the criteria that they had issued based off the stress tests, bailed out banks would’ve likely exited TARP in a much stronger capital position, Romero explained.
“I would say that there was arguably a missed opportunity to strengthen the quality of these institutions’ capital base before they exited TARP,” she added.
Even as most of the big banks have left TARP’s auspices, more than 400 smaller community banks remain in the program, she said, and the bending of the rules for the larger banks have thrown into question a clear exit strategy for the rest.
The other key lesson deals specifically with Treasury’s ranks of regulators.
“I think the lesson learned is that federal banking regulator along with Treasury really bears responsibility for ensuring that the nation’s largest and systemically important financial institutions hold enough high-quality capital, so that they can absorb their future losses in the event of a possible future severe shock to the financial system.”
More simply, Romero said, government regulators need to “stay vigilant,” against pressure from banks.
The main regulatory agencies — the Federal Reserve Board, Treasury’s Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp — each faced different responsibilities, she said, but all had to work together — a bright spot in the IG report.
“And that was one of the good things that we found … The working together, the checks and balances that happened … clearly resulted in a much stronger exit for these banks than would’ve been the case,” she added. “And that needs to continue to happen.”
Tom Temin is the host of The Federal Drive, which airs from 6-9 a.m. on 1500 AM in the Washington, DC region and online everywhere. Tom has 30 years experience in journalism, mostly in technology markets. Before coming to Federal News Radio, he was a long-serving editor-in-chief of Government Computer News and Washington Technology magazines.