RTTNews - A Troubled Asset Relief Program watchdog panel said Tuesday that although the banking system has stabilized due to the U.S. Treasury's $700 billion bailout, banks -- especially smaller ones -- still have a substantial amount of troubled assets on their balance sheets.

The TARP Program was originally created to enable the Treasury to buy troubled and toxic assets from the bank, but the Treasury instead used the TARP funds to give banks capital to write-down their troubled assets and build up their reserves.

This has raised concerns from the Congressional Oversight Panel in its August report that many banks could be short of capital if the economy suffers another downturn because losses on troubled assets would grow.

The COP did say, however, that all but one of the biggest bank holding companies would have enough capital if the economy got worse.

The report also raised questions about the effectiveness of the Treasury's Public-Private Investment Program. The panel raised concerns over whether program rules that allow banks to carry assets at higher valuations will diminish their willingness to sell and whether potential buyers may decline to participate due to concerns about political interference or government restrictions.

Small banks were also addressed in the COP's report. The panel said that small banks are in danger of losing more money because they hold greater concentrations of commercial real-estate loans, which pose threats of high defaults. It added that difficulties for small banks to access capital markets will heighten concerns about their financial stability.

The COP also said that the banks' troubled assets are generally in whole loans, which are not addressed by PPIP, another reason why they remain so vulnerable.

The report went on to recommend that that stress tests that have been afforded large banks-Bank of America, Citigroup Inc., etc.-should be adapted to consider the challenges facing smaller banks, and that capital support that has been given to larger institutions should also be given to these smaller banks. It also recommended that stress tests be repeated if the economy worsens.

In addition, the COP recommended greater transparency among banks in the disclosure of details about the toxic assets on their books, in order to allow for better judgments about the scale of financial problems and the adequacy of the government's response to such problems.

The COP was created in 2008 to oversee the spending of TARP funds and to provide recommendation on regulatory reform. They have issued many reports on the government's bailout efforts. It is headed by Harvard Law School Professor Elizabeth Warren and includes among its members, Congressman John Hensarling (R-TX); Richard Neiman, superintendent of banks at the New York State Banking Department; associate counsel at the AFL-CIO, Damon Silvers; and former Senator John Sununu (R-NH).

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