Banks receiving government aid cut loans

By:  Dennis Cauchon
USA Today

Banks that received federal assistance during the financial crisis reduced lending more aggressively and gave bigger pay raises to employees than institutions that didn't get aid, a USA TODAY/American University review found.

The reduction of credit during the worst of the recession raises questions about whether the $247 billion assistance program achieved one of its primary goals: to stimulate the economy by reviving the flow of credit to businesses and individuals.

USA TODAY and the American University Investigative Reporting Project used federal bank data to conduct the first comprehensive analysis comparing the behavior of 940 banks in the Troubled Asset Relief Program (TARP) and 7,400 banks outside it. Key findings about TARP's first year:

• Lending fell. The amount of loans outstanding to businesses and individuals fell 9.1% for the 12 months ending Sept. 30, 2009, at banks that participated in TARP compared with a 6.2% drop at banks that didn't.

• Employee pay rose. Average pay at banks getting aid rose 9.4% in the program's first year. By contrast, non-TARP banks increased salaries 1.8%.

• Cost-cutting limited. Banks in TARP cut costs less than those outside the program. Government-aided banks increased branches by 2.7% while non-TARP banks cut branches by 1.2%.

The differences narrowed in the last three months of 2009 as many banks repaid the government.

President Bush signed TARP into law on Oct. 3, 2008, at the peak of the financial crisis. The program sought to stabilize the financial system and restore the flow of credit. Banks have repaid about $181 billion, including interest and dividends.

Rep. Jeb Hensarling, R-Texas, says the analysis shows that TARP "has been highly ineffective."

The Treasury Department, which runs TARP, says the program succeeded. Treasury spokeswoman Meg Reilly says "overall lending is improving as a result of the government's actions."