Thanks to the efforts of the federal government and, subsequently, American taxpayers, the United States and the global banking system were “saved” from a financial meltdown in the fall of 2008.

The largest banks — those considered too large and too important to fail — received large amounts of unprecedented financial aid from the federal government. Those monies came primarily from the Troubled Asset Relief Program (TARP). In return for the money, the banks gave up significant ownership stakes to the government and agreed to operate under some fairly restrictive covenants.

It is interesting to note that the federal government wanted the banks that received TARP money to increase their lending to small businesses and consumers as a way to help the economy recover from recession. Unfortunately, lending by the large banks actually decreased, and the banks used the TARP money and other money borrowed at essentially zero percent (from the government) to instead generate trading profits.

Traditionally, the largest banks have a large part of their profitability tied to the stock market and profits derived from trading for customers and their own house accounts. So, as the U.S. stock market recovered from the lows reached in March to the recent highs this month, the trading activity provided enormous profits to the banks and bolstered their balance sheets.

In turn, the stronger balance sheets allowed the banks to raise more capital by selling additional shares and issuing new debt. That new money was then used to pay back the federal government’s TARP loans. More importantly, the repayment of TARP allowed the banks to get out from under the federal ownership, covenants and influence — i.e. the pay restrictions for top executives.

So, are the banks OK? Well, yes and no. The largest banks I have just discussed are certainly a lot healthier, and if they avoid their past transgressions they should continue to do well. My concern lies with the small regional banks. Many of them received federal TARP monies as well, but their situations and subsequent recoveries are much more in doubt.

Regional banks don’t have large investment banking and trading operations. The regional banks concentrate more on typical banking activities — such as attracting deposits and lending to small businesses and consumers. Unfortunately, many of the regional banks overweighted their lending to residential and commercial real estate in the boom years of lax underwriting and easy credit.

By now, everyone is familiar with the meltdown of the residential real estate market and the problems with primary mortgages and underlying home values. There are still a lot of foreclosures and short sales that will result in the next couple of years. Additionally, U.S. consumers took out billions of dollars in Home Equity Lines of Credit (HELOCs) to pay for remodels, new cars, vacations and college expenses. Those liens are beginning to show signs of distress as well.

Lastly, the regional banks invested and loaned heavily in the commercial real estate markets. Many properties were purchased at the top of market pricing and are now experiencing higher vacancies and lower cash flows that may not satisfy the loan agreements.

The bottom line is that this is an era of continued uncertainty in the banking system. While I am encouraged that the bigger financial institutions are now on solid ground, the smaller banks will still have a couple of tough years ahead.

— Bill Masho is the broker/owner of Masho Associates. He can be reached at 805.895.4362.