'COP' warns that bad assets still threaten banks

WASHINGTON -- Despite signs 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 panel says.

Ten months into the federal rescue program, the troubled assets "remain a substantial danger to the financial system," the report says. "Financial stability remains at risk if the underlying problem of toxic assets remains unresolved."

In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel (COP) 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 Tuesday.

"The financial system (remains) vulnerable to the crisis conditions that (the bailout) was meant to fix," the panel wrote in a draft copy of Tuesday's report.

The Congressional Oversight Panel was created as part of the Troubled Asset Relief Program, or TARP. It is designed to provide an additional layer of oversight, beyond the Special Inspector General for the TARP and regular audits by the Government Accountability Office.

The report says many of the Obama administration's financial stability efforts are working — including infusions of capital for banks, heightened scrutiny of capital ratios, "stress-testing" of large financial firms. It also points to a public-private investment plan designed to buy up bad assets that has yet to get off the ground.

But with banks still holding the assets at the heart of the crisis, they remain vulnerable, the panel says.

"These steps have ... allowed the banks to take significant losses while building reserves," the panel wrote in the draft report. "Nonetheless, financial stability remains at risk if the underlying problem of toxic assets remains unresolved."