WASHINGTON, DC-Smaller community banks need a clear exit path from the Troubled Asset Relief Program, a new report by the Special Inspector General for TARP finds. For the moment, none exists, despite the dramatic efforts the Treasury Department put forth to facilitate the exit of the largest banks from the government program.

Indeed, if nothing else, this report emphasizes yet another discrepancy in the regulatory treatment between the big money banks and smaller institutions, which claim, often quite rightly, they are held to higher standards.

It is a common misperception is that most of the 707 TARP banks have paid back TARP, according to the report. In reality, “only the largest banks have exited TARP. Smaller and medium size banks are not exiting TARP with the same speed as the larger banks, with approximately 400 still in TARP.” These banks are challenged because they do not have the same access to capital as larger institutions do and are more exposed to distressed commercial real estate assets and non-performing loans.

On the other hand, the Treasury Department pulled out all stops to help the largest 17 TARP recipient banks to exit the program. After the strongest nine banks exited TARP, regulators decided the remaining banks could expedite a TARP exit by issuing $1 in new common equity for every $2 in TARP repaid.

The Special Inspector General for TARP recommends a clear exit plan for community banks that is put into action before a scheduled rise in the TARP dividend, which will begin in the fall of 2013. “The best exit path for community banks should involve access to new capital to replace the TARP capital,” the report concludes. “After five years, the 5% TARP dividend rate will rise to a very expensive 9%.”