Bad loans still a risk to banks, panel says

By Daniel Wagner
Associated Press / August 11, 2009

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WASHINGTON - Despite signs that the financial system has stabilized, banks remain threatened by billions of dollars of bad loans on their balance sheets, and more could fail if the economy worsens, a congressional watchdog reports.

In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel warns that banks still hold many risky loans of uncertain value. If unemployment rises sharply or the commercial real estate market collapses - as many economists fear - the banking system could again lose its footing, the panel says in a report to be released today.

“The financial system [remains] vulnerable to the crisis conditions that (the bailout) was meant to fix,’’ the panel wrote in a draft copy of the report.

The Congressional Oversight Panel was created as part of the Troubled Asset Relief Program.

Small banks are especially vulnerable, the report notes. Also, owners of shopping malls, hotels, and offices have been defaulting on their loans at an alarming rate, and the commercial real estate market isn’t expected to hit bottom for three more years, industry experts have warned.