Magazine article American Banker

Failure of Tarp Banks Remains Industry Concern

Magazine article American Banker

Failure of Tarp Banks Remains Industry Concern

Article excerpt

Byline: Robert Barba

As the Treasury Department winds down the Troubled Asset Relief Program, some banks will exit on their own, some by auction and others by burning out.

Regulators shuttered two banks with Tarp money last week. The holding company for the $201 million-asset Excel Bank had $4 million in subordinated debt from Tarp, and the $159 million-asset GulfSouth Private Bank had $7.5 million in preferred stock.

Of the more than 700 banks that received Tarp, about 20 have failed since the onset of the financial crisis. Six of those banks have failed this year, with the Tarp investments ranging from $900,000 to the parent of Glasgow Savings Bank to $30 million at the holding company of Tennessee Commerce Bank.

The failures serve as a good reminder that, while Tarp was a buffer for many, it certainly wasn't a panacea, banking lawyers say.

"There are plenty of banks that could have survived had they received Tarp, but then there are some who got it, but tanked despite how viable they looked at the time," says Lawrence Kaplan, a partner at Paul Hastings.

"Tarp has not been a vaccination against failure," Kaplan says. "Some Tarp banks got sick and it didn't give the regulators any pause."

The number of Tarp failures is relatively low because community banks had to pass a viability test before receiving the infusion. After the initial rounds of investments in late 2008, smaller banks had to prove to the Treasury that they could survive without Tarp capital in order to qualify for the funding.

Conditions change. As the economy continued to sputter, the capital cushion has thinned for many Tarp recipients. As a result, more banks with Treasury funds are likely to fail. Thirty of the 185 banks that are considered to be at high risk for failure have Tarp funds, according to second-quarter data from Trepp.

The iBank Monitor, another firm that tracks banking data, has 15 banks with Tarp investments of $306. …

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