When the Treasury introduced the Troubled Asset Relief Program (TARP) last fall, its goal was to provide funds to institutions so they could clear the toxic assets off their books. But by the time the legislation creating TARP was passed in October, Treasury went with a different strategy, distributing funds to banks so they could build up loss reserves. Even as banks are beginning to repay the government for the TARP investments, many of those bad assets remain on the books. It’s nearly impossible to accurately enumerate the toxic assets on banks books, according to the 145-page August oversight report “The Continued Risk of Troubled Assets,” issued Tuesday by the Congressional Oversight Panel. “In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem,” the report said. To make matters worse, the value of Level 3 assets on the books of the 19 stress-tested financial institutions is increasing. Bank of America (BAC), PNC Financial (PNC), and Bank of New York Mellon (BK) had twice as many assets in Q109 as they did in Q408. Morgan Stanley’s (MS)Level 3 assets account for more than 10% of its total assets. The Public-Private Investment Program (PPIP) was introduced to do what TARP was originally supposed to — provide funding to clear toxic assets off lenders’ balance sheets.  So far, $657.5bn is the combined estimated value of 'Level 3' assets, those most likely to be toxic, sitting on the books of the 19 of the countries largest financial institutions that underwent the Treasury Department’s so-called “stress tests” earlier this year. These types of assets are those with unobservable variables, which makes assigning a value difficult. Because of this, there are lax standards and inconsistency in how institutions report these assets. One thing the panel is sure of is that PPIP isn’t maximizing its effectiveness. While PPIP addresses troubled mortgage securities, it does not address whole loans, which are held in greater proportion by small banks. The report also notes that banks smaller than the 19 subjected to the stress tests also hold more concentrations of commercial real estate loans, which face the risk of a surge in defaults. On top of that, small banks have less access to capital markets than larger banks. “Despite these difficulties, the adequacy of small banks’ capital buffers has not been evaluated under the stress tests,” the report said. The report concludes there must be continued vigilance in monitoring how PPIP is implemented, and changes should be considered, when warranted. “If PPIP participation proves insufficient, Treasury may want to consider adapting the program to make it more robust or shifting to a different strategy to remove troubled assets from the banks‘ book,” it said. Write to Austin Kilgore.