Economics Issue Area

Banks to repay TARP - issues ahead

Jun 9, 2009 | Budgets & Projections
June 9 - Treasury announced today that 10 of the nation's largest banks can now repay TARP borrowing because they had been able to raise capital in the financial markets without government guarantees backing their debt. Many financial market observers and participants have interpreted this as a sign that the financial crisis is easing.
 
However, as Treasury Secretary Tim Geithner said, "These repayments are an encouraging sign of financial repair, but we still have work to do."
Most critically, we need greater transparency. In its June report released today, the TARP Oversight Panel (the Warren Panel) has found that there was not sufficient transparency for stress tests assumptions or financial institution inputs. In the absence of better information, it is very difficult to assess the reliability of the stress test results and the necessary public policy steps going forward.
 
Also, the transparency and communication of financial policy objectives and policies must improve. While we recognize that the regulators are managing an extremely complex crisis, they must improve their public communication. Too often, especially in recent weeks, policy has been communicated through leaks to the press rather than through well-articulated policy guidance. This approach has given rise to the perception that policy more reflects ad hoc negotiation rather than public policy principles put in place to protect the public interest.
 
It is particularly important that the taxpayer, who is on the hook for the government assistance, be better informed about his or her potential liability. Greater transparency and communication will help here, too.
 
We also need to better understand the risks going forward. In this context, we need guidance on how the Administration and financial regulators plan to address problems related to the considerable amount of toxic assets remaining on the books of many banks, presumably including those just approved for Tarp repayment. Moreover, as the financial system is still recovering, it would be extremely useful if policymakers clarified going forward what there "Too Big To Fail" policy actually is, so that mixed signals are no longer given and the moral hazard risks are minimized.
 
More practically, it is also important not to lose sight of risks from a still-weak economy and global financial system. As the Warren Panel experts pointed out, the economy may turn out to be worse than expected under even the worst case scenario. In particular, if the unemployment rate continues to rise at the pace of the year so far, it may exceed the average assumed for the year in the worst case scenario under the stress test. The Warren Panel experts also raise concerns that commercial real estate risks may not have been sufficiently taken into account by the limited forecast horizon this year and 2010.
 
For the Treasury statement, click here
 
For the Warren Panel report, click here