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Many bailed out small US banks may go out of business: Panel

A US Congressional panel has cautioned many small American banks, that were bailed out by the government, could collapse in the coming years due to mounting liabilities.

world Updated: Jul 14, 2010 23:07 IST

A US Congressional panel has cautioned many small American banks, that were bailed out by the government, could collapse in the coming years due to mounting liabilities.

The US government had pumped billions of dollars into the country's banking system as part of efforts to help many banks tide over the financial meltdown in 2008-09.

The repayment terms of the Capital Purchase Programme (CPP) -- that saw billions of dollars worth taxpayers' money flowing into financial institutions -- mostly benefited large banks than the smaller ones, according to the panel.

CPP was part of the over USD 700-billion Troubled Asset Relief Programme (TARP).

In its report titled 'Small Banks in the Capital Purchase Program', the panel pointed out that many such entities could find it even impossible to exit the programme, particularly if the current distressed financial markets persist.

It noted that at least one in seven small banks have already missed a TARP dividend payment. Entities that received TARP funds are to pay a dividend on the received amount to the US government.

"The problem (of dividend payment) will grow worse in a few years, when TARP's dividend rate will nearly double from a relatively modest 5 per cent to a very expensive 9 per cent.

"This, in combination with other strains from the recession and commercial real estate liabilities, could force some banks to default on their obligations to taxpayers, consolidate, or collapse," the report said.

According to the panel, of the 19 American banks with more than USD 100 billion in assets, 17 participated in the CPP, receiving 81 per cent of the total CPP funds.

"By contrast, of the 7,891 banks with assets of less than $100 billion, only 690 received funds from CPP and less than 10 per cent have repaid," it added.