It's the small banks you have to watch

A bank sign

TEXT OF STORY

Kai Ryssdal: If TARP hasn't already become a part of your daily vocabulary here's a refresher. It's the Troubled Asset Relief Program, last fall's $700 billion bailout to stabilize the financial system. Today the congressional panel that's supposed to monitor the program gave us an update. The headline goes like this: The financial system may not be out of the woods just yet. And it's the small banks you gotta watch. Marketplace's Jeremy Hobson reports.


JEREMY HOBSON: The report says smaller banks are more likely to be hurt by troubles in the commercial real-estate market. Loan defaults are rising, as layoffs and weak consumer spending empty office buildings and malls.

Harvard Professor Elizabeth Warren chairs the TARP oversight panel. She says if there's bust in commercial real-estate, it's still to come because many mortgage rates haven't reset yet.

ELIZABETH WARREN: That is the mortgages that were put out in 2006, 2007, even into 2008 don't come due until 2012, 2013, 2014 and that's when the numbers really start to get big.

The panel recommends more stress tests for the 19 largest banks that were already tested, but especially for the smaller ones that weren't.

WARREN: They are the principle lenders to small businesses and so when small banks go down, it means that our capacity to get more money into the hands of small businesses shrinks.

Bruce McCain is chief investment strategist for Key Private Bank. He says the panel's report is a good list of things to worry about if the economy heads back downhill.

BRUCE MCCAIN: But for the moment things seem to be trending in a good direction, and we'll hope that their dire warnings about what could happen simply will not happen.

Furthermore, McCain says, small and regional banks don't pose nearly the same threat to the overall economy as the 19 largest banks.

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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