‘COP’ warns that bad assets still threaten banks
In spite of signs the money system has stabilised, banks remain threatened by billions of dollars of bad loans on their balance sheets, and more could fail if the economy gets worse, a congressional watchdog panel says. 10 months into the federal rescue program, the uneasy assets “remain a significant danger to the monetary system,” the report says. “Financial stability stays at risk if the root of the problem of poisonous assets remains unresolved. In its latest evaluation of the $700 bln financial system rescue, the Congressional Oversight Panel ( COP ) cautions that banks still hold many dangerous loans of uncertain value. If unemployment rises sharply or the commercial real estate market falls down as many financial consultants fear the banking system could again lose its footing, the panel announces in a dispatch to be released Tues. .
“The finance system ( remains ) exposed to the emergency conditions that ( the rescue ) was intended to fix,” the panel wrote in a draft copy of Tues.’s report. The Congressional Oversight Panel was made as a part of the Uneasy Asset Relief Program, or TARP. It is meant to supply an extra layer of oversight, outside the Special Inspector General for the TARP and regular audits by the Government Accountability Office. The report asserts lots of the Obama administration’s money stability efforts are working including infusions of capital for banks, heightened scrutiny of capital proportions, “stress-testing” of large monetary firms.
It also points towards a public-private investment plan designed to purchase bad assets that still has to get off the ground. But with banks still holding the assets at the guts of the emergency, they remain exposed, the panel says. “These steps have authorized the banks to take major losses while building reserves,” the panel wrote in the draft report. “Nonetheless, fiscal stability stays at risk if the real problem of poisonous assets remains unresolved.
Little banks are particularly exposed, the report says. The troubled assets weighing on their balance sheets sometimes are in the shape of complete loans, as against the mortgage-backed stocks formed from bundles of numerous loans. The Treasury Dept’s main program for grabbing bad assets now targets those instruments and not supposed “whole” loans. Additionally, the report announces, regional and smaller banks hold larger numbers of commercial real estate loans, “which pose a potential threat of high defaults.” it announced the adequacy of small banks’ capital cushions against losses has not been graded by the governing body, which performed “stress tests” in May only on the 19 largest US banks including Bank of America, Capital One Fiscal , Citigroup, GMAC, Goldman Sachs, JPMorgan Chase and Wells Fargo.
Owners of shopping malls, hostels and offices have been defaulting on their loans at a worrying rate, and the commercial real estate market isn’t predicted to hit bottom for 3 more years, industry leaders have claimed. Delinquency rates on commercial loans have doubled the year just gone to 7% as more corporations downsize and outlets close, according to the Federal Reserve. The commercial real estate market’s fortunes are tied closely to the economy, particularly unemployment, which registered 9.4% last month.
As folks get made redundant, or have their hours reduced, they cut spending, which wounds outlets, and they take less trips, influencing hostels and other travel-related businesses. The oversight panel has issued a chain of reports on the governing body’s monetary rescue programs, raising questions about their management and oversight. It is lead by Harvard Law Faculty professor Elizabeth Warren. The other members are Republican Rep Jeb Hensarling ; Richard Neiman, super of banks at the Big Apple State Banking Dep. ; Damon Silvers, associate advocate at the AFL-CIO ; and previous Republican Sen John Sununu of New Hampshire. The new report was adopted by the panel 4-1 Monday with Hensarling voting against it.
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