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TARP funding for large banks disadvantages CUs
WASHINGTON (3/21/11)--The lasting legacy of the Troubled Asset Relief Program (TARP) could ultimately be the worsening of the problems posed by “too big to fail” financial institutions, as that program has helped many big banks grow even larger, TARP Special Inspector General Neil Barofsky said late last week. Testifying before the Senate Banking Committee on Thursday, Barofsky noted that TARP has put small issuers, such as credit unions, at a disadvantage by granting larger institutions greater access to cheap credit and capital. “Cheaper credit,” in this case, “is effectively a government-granted subsidy, which translates into greater profits, and which allows the largest institutions to become even larger” while “materially disadvantaging” smaller financial institutions, he added. The safety net provided by TARP has caused credit ratings agencies to continue to give higher credit ratings to large institutions, and has given executives of larger firms greater motivation to take greater risk, Barofsky said. “The prospect of a government bailout also reduces market discipline, giving creditors, investors and counterparties less incentive to monitor vigilantly those institutions that they perceive will not be allowed to fail,” he added. Barofsky said that while one of the central elements of the recently enacted Dodd-Frank financial reform package was to end "too big to fail," there is not sufficient evidence that the issue has been solved. In fact, Barofsky noted that the funding advantage that larger banks hold over their smaller competitors has increased since Dodd-Frank was signed into law. For more of Barofsky’s testimony, use the resource link.
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