TEXT OF INTERVIEW

Steve Chiotakis: Smaller American banks — those with assets below $100 billion — are less likely to be able to repay money from the Troubled Asset Relief Program. They could run into some big problems
down the road because of that. That’s the latest warning from the Congressional Oversight Panel, out with its monthly report on TARP today. Harvard Law professor Elizabeth Warren chairs the panel, and she’s with us now. Good morning, professor.

Elizabeth Warren: Good morning.

Chiotakis: Now if TARP, professor, was supposed to help the entire financial system recover, why then are smaller banks still feeling such pain?

Warren: Well, the smaller banks in part have been hit a little later in the crisis. It took them a very long time to get TARP money, and now only 10 percent have been able to repay it, and 15 percent of the smaller banks that got money have already missed at least one of their dividend payments — suggesting that they’re in real financial distress.

Chiotakis: So then what are the threats to smaller banks?

Warren: Well, smaller banks are facing big losses in commercial real estate. The amount they have to pay in the dividends on TARP will rise sharply. And they are, quite frankly, at a competitive disadvantage to try to go into the market and raise capital, because they’re competing against banks that have an implicate guarantee, the “too big to fail” banks.

Chiotakis: Why not have a Citibank on every street corner and forget about the small banks?

Warren: Well the small banks are important to our financial system for two reasons. One is they disproportionately take care of the lending to small businesses. Also there’s a notion that a diversified banking system — a system that has big banks, small banks, regional banks and banks in different parts of the country will be more robust and less likely to tumble when there are economic problems.

Chiotakis: So what’s the solution here?

Warren: Well, the best thing I can say is that this report flags a problem for Treasury. So there’s some time for Treasury to rethink this program, do some restructuring, and — quite bluntly — time for Treasury to work out a plan to deal with the bank if they’re not going to repay and think about how they can be structured — or, unfortunately, how they can be closed.

Chiotakis: Harvard Law professor Elizabeth Warren chairs the Congressional Oversight Panel. Thank you so much, professor.

Warren: You’re welcome.