Large Banks and Small Banks in an Era of Systemic Risk Regulation

Are you a 'student' of the banking crisis? Trying to keep up with everything you need to know to do your job well while at the same time keeping your eye on the bigger picture?

I am finding that because 'banking' is my field, every business person I meet expects me to be up on the causes, effects and solutions to the banking crisis. So I have been watching for information that will help you do the same.

In an article in the Cherry Creek News, North Carolina Governor Daniel K. Tarullo does a credible job of comparing the causes and impact of the recession for large and small (community) banks. He also put forth some very interesting statistics regarding the competitiveness of community banks versus large banks.

Here is what popped for me:

• On average, commercial banks with less than $1 billion in assets reported a modest net profit during the first quarter of 2009, recovering from an average loss position in the fourth quarter of 2008.
  
• This average figure hides the fact that nearly one in five of these banks lost money in the first quarter.
  
• As of March 31, nonperforming assets were twice the level of one year ago, and when measured against total loans and the category of Other Real Estate Owned, stood at an historic peak.
  
• Furthermore, capital ratios, although still strong for these banks as a group, have fallen since early 2008.

Even with all that has happened in the increase of large bank branches and credit unions making business loans, Governor Tarullo  asserts that "many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms."

He says that is because their business model is based on an important economic explanation of the role of financial intermediaries--to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.

I was surprised that a small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks. The Governor says that "for most community bankers, the increased presence in their local markets of large, geographically diversified banking organizations appears not to adversely affect profitability.

"This circumstance may be due to the fact that a branch manager at a large depository institution typically does not have the same local connections and relationships as a community bank president."

Community Banks and Credit Unions
In my experience, credit union lenders and community bank lenders are much more alike than different compared to community bank lenders and large bank lenders. So much of what the Governor had to say about community banks directly applies to credit unions as well.

There is much more in the article and for students of the crisis, it is worth the read. Read the entire article here ...

What do you think?