The Small Bank Crisis
Lost in all the hubbub about the losses and possible collapse of our largest banks – most of the fuss has been about only the 19 largest banks in the country – is the ongoing crisis that the small, local, banks are facing. So it is worth taking note of what’s going on at the lower levels of our financial system.
And the news is not good.
The latest FDIC report shows some very disturbing trends among our smallest banks. For instance over one fifth are not making any money: the figures for the first quarter include the fact that 22.5% of all banks with less than $100 million in assets are unprofitable. Not all of these will go out of business, but a large percentage will. The FDIC has been very busy so far this year winding up small banks, about 21 through March, and the likelihood is that many more will disappear as we go through the nest wave of loan losses.
Smaller banks are particularly prone to commercial real estate losses because those types of loans make up a much higher percentage of their total loan book. So with the oncoming rush of property developer defaults, which is typical at this time of any recession, the pressure on smaller banks will intensify.
Couple this with the alarming drop in profitability small banks have suffered over the past two to three years – returns on assets have dropped by almost two-thirds for the group of small banks as a whole – and the situation is even worse.
Finally there seems to have been a shift of deposits out of smaller banks towards larger ones. This deprives the smaller banks of their most reliable source of funding and reduces their ability to finance activities in their local communities. Since smaller banks play a pivotal role in many of America’s more rural areas their plight is especially relevant and should not be overlooked.
The administration has begun to shift its bailout attention towards the lower end of the banking market in anticipation of the difficulties that are now emerging there: there are now 305 banks officially listed as being ‘problematic’. The cost to the FDIC of winding up those 21 small banks led its reserves to drop from $17.3 billion to $13 billion in the first quarter alone. As a result it has levied new fees on the banks who benefit from its guarantees in order to raise almost $5.6 billion to create a war chest to deal with the problem banks on its list.
So, while our attention is inevitably focused on the ‘too big to fail’ banks like Citigroup and Bank of America, we should acknowledge the crisis brewing down below. One result of this recession will be a further reduction in the number of small banks scattered across the country. It is not just Wall Street that is being re-cast. Main Street is getting a make over too.
