Local Community Banks Weather the Storm

Thousands of Small Community Banks Weather The Crisis

Community banks got a raw deal this past year. Consumers lumped them together with Wall Street institutions, blaming them for the near collapse of the financial system and for the lack of transparency in the use of TARP funds. Yet only a handful of Wall Street behemoths were the major culprits, and the major recipients of TARP funds. These mega–corporations helped drive the country into a major recession through poor management and excessive risk–taking in subprime mortgages and other dubious financial products.

In reality, most of the 7500 local community banks across the nation had very little to do with this debacle. Over the past 2 years the FDIC has stepped in to cover 120 failed banks. While this is a serious ongoing crisis for the FDIC, it amounts to 1½% of the total. These 7,500 banks hold less than 10% of the $13+ trillion of total bank assets, are relatively healthy, with minimal exposure to high risk mortgages. They are boring, conservative and profitable. Small–town bankers prefer the slow and steady approach to investing, with risks they understand. They serve communities where they grew up and are far more concerned with the embarrassment of financial troubles than their giant Wall Street competitors. As one community bank president recently said, “If banking gets exciting, there is something wrong with it.“

The small percentage of community banks that failed are concentrated in a few states, such as California, Nevada, Arizona and Florida; areas where the housing market got way ahead of itself and suffered a major correction when the bubble burst. On the other hand, the most solid banks are in areas where real estate remained relatively stable, and regulations remained strict. Vermont, New Hampshire, West Virginia & South Dakota have the least foreclosures per capita due to a combination of bank regulations and controls over new housing construction.

Regulators also gave community banks tougher scrutiny over the past year due to looming problems with commercial real estate. As commercial property values plunged regulators required more capital on hand as the loans were written down to reflect current market values. However a break from the government in the form of new rules now allow for banks to re–arrange troubled loans with borrowers. As long as a borrower is making payments, new regulatory capital will not be required if the collateral has also lost value. That’s good news for the industry as a whole, as most community banks are invested in commercial real estate and will benefit from the new rules.

How Big is “Too Big”

There are more than 8,195 banks in our country. FOUR of these banks control 40% of all deposits. JPMorgan Chase, Citibank, Bank of America and Wells Fargo. These four, plus Goldman Sachs, together hold 97% of America’s notional derivative exposure. Yikes!

JPMorgan Chase, employs 220,000 people, serves over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. If it fails, for whatever reason, who pays the bill? Surely its shareholders and creditors, but what about its employees, taxpayers, the FDIC and depositors?

No Matter How You Slice It, ‘ Small Is Beautiful’…

While the Democrats so often push for huge centralized government bureaucracy, Republicans were largely responsible for the reckless deregulation of banks back in the ‘ 80’s and ‘ 90’s, allowing banks to grow beyond their state borders, swallow up smaller banks and merge with other types of financial entities. The result? We now have a brand new business category … “too big to fail”!

Small Is Beautiful: Economics As If People Mattered is a collection of essays by the notable British economist E. F. Schumacher. First published in 1973, Small Is Beautiful brought Schumacher’s critiques of Western economics to a wider audience during the 1973 energy crisis and emergence of globalization. The Times Literary Supplement ranked Small Is Beautiful among the 100 most influential books published in the past sixty years.

Schumacher was a respected economist who worked with John Maynard Keynes and John Kenneth Galbraith. He proposed the idea of “smallness within bigness“: a specific form of decentralization. For a large organization to work, according to Schumacher, it must behave like a related group of small organizations. Schumacher’s work coincided with the growth of ecological concerns and with the birth of environmentalism. He became a hero to many in the environmental movement. Schumacher was one of the first economists to question the appropriateness of using GNP to measure human well–being, emphasizing that “the aim ought to be to obtain maximum well–being with minimum consumption.“