Small banks failing as larger firms regain health

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Published: November 8,2010

Tags: bailouts, banking, collapse, lending, small banks

WASHINGTON — U.S. banks are failing at the fastest rate in two decades.

No, the financial crisis hasn’t returned. Wall Street doesn’t need another bailout.

But in communities around the country, 143 banks have collapsed so far this year – more than all of last year. This time, the failed banks are smaller, on average, than in 2008 and 2009. The damage to the industry has thus been milder this time. Still, the wave of closings points to the persistent struggles of many communities and states.

On Friday, regulators closed four small banks: One each in Maryland and Washington state and two in California – one of the hardest-hit states, where a dozen banks have failed this year.

As larger banks have regained their health this year, thanks in part to federal aid, smaller ones have struggled. Here’s why:

- Small banks made the riskiest commercial real estate loans – those used to develop apartment buildings, malls and industrial sites.

- Smaller banks didn’t receive the taxpayer aid given to Wall Street banks.

- The smaller banks haven’t had to bolster their financial health as much as larger banks have.

- Banks must write off bad loans as more borrowers fail to pay.

An additional problem is that unlike larger banks, smaller ones can lend only in their communities. If a local economy is weak, large lenders can tighten credit there. They can make more loans elsewhere. Small banks lack that option.

Despite the higher number of bank closings this year, the hit to the banking system has been less than last year. The assets of this year’s failed banks totaled about $89 billion. That’s scarcely more than half the combined assets of the 140 banks that failed in 2009. All but one of the 143 to fail this year had under $10 billion in assets. And about three-fourths of those banks had less than $1 billion.

By contrast, Bank of America, the nation’s largest bank, has assets worth about $2.3 trillion.

The smaller size of this year’s failed banks has meant that the government has had to pay only about $21 billion to cover losses to depositors. That compares with $36 billion last year. The smaller losses enabled the Federal Deposit Insurance Corp.’s board to cancel a scheduled fee increase for banks.

As larger banks have scooped up the failed ones, lending hasn’t been much affected by the closings. Still, the wave of closings speaks to the lingering pain of the Great Recession.

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One Response to “Small banks failing as larger firms regain health”

  1. b Says:

    I hope you can see that the banker bailout went to firms like Goldman Sachs to keep them afloat while the private Federal Reserve Bank shuts down smaller banks and/or forced sale to the ones bailed out.

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

    Thomas Jefferson, (Attributed)

    3rd president of US (1743 – 1826)

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