It’s a good idea to point out that small banks are failing, too. This is hardly a news flash, but it’s important to revisit this since so much of the financial reform proposals, ridiculously, exempt small banks from their restrictions.
The Consumer Financial Protection Agency? It only applies to banks with more than $10 billion in assets—meaning just 2 percent of U.S. banks are covered.
But McClatchy goes too far here in a story comparing small banks’ actions to the big boys. Here’s its lede, for instance:
As law enforcement agencies and regulators investigate the likes of Goldman Sachs and Morgan Stanley, and lawmakers debate legislation to revamp financial regulations, it’s become conventional wisdom that big investment and commercial banks caused the crisis and small community banks are paying for the sins of others.
That’s not true, however. Georgia leads the nation in bank failures since the crisis began, and all of them have been at small banks, most caused by bad loans to builders.
Well, it may not be true, but Georgia doesn’t refute that. The straw-man antennae go up anytime I see sweeping statement like “conventional wisdom that big investment and commercial banks caused the crisis and small community banks are paying for the sins of others.”
Who’s saying that? I don’t see anyone quoted in this story saying small banks are blameless. And while big banks had a critical role, nobody seriously thinks that they did it alone. What about the non-bank entities we now know as the shadow-banking system?
The headline is also sending out straw signals:
Small banks made bad decisions, too, as Georgia illustrates
No kidding!
Still, it’s worth noting the timeline of the bank failures and almost failures. No one disputes that lots of small Georgia banks made stupid loans. Clearly they did.
But you don’t have to be a small-banks apologist to think that their problems were significantly worsened by the ripple effects from the TBTF financial institutions. Of the thirty-eight Georgia bank failures so far, just two happened before the AIG/Lehman/Fannie/Freddie Month of Doom in September 2008.
So, let’s revisit why it’s right to focus on the TBTF folks.
The main points of the anti-TBTF stance are that smaller institutions spread the risk around and don’t get implicit subsidies that distort the marketplace. They make for a more-robust system where a failure doesn’t blow a hole in the side of the economy. Any one of these small banks can likely fail without blowing up the national economy (or even the Georgia economy—or even the Atlanta economy!).
Remember that stat I had up top? Just 2 percent of U.S. banks have more than $10 billion in assets apiece? So why focus on that 2 percent? Because those biggest 2 percent of U.S. banks have 80 percent of U.S. deposits.
I went through the FDIC’s Failed Bank List and added up all the assets of the thirty-eight Georgia banks that have gone under. It comes to a not-so-whopping $23.4 billion.
Now, $23.4 billion is a lot of money (that doesn’t mean that’s how much was lost—losses vary but are averaging about a quarter of total assets)! But so is $2.34 trillion. That’s the total assets held by Bank of America a few hours up I-85. In other words, all the failed banks in Georgia had 1/100 the assets as one should-have-failed bank in Charlotte.
Why didn’t Bank of America fail? Because it was so big we couldn’t let it go. Uncle Sam put the America in BofA with $45 billion in direct bailouts and agreed to guarantee $118 billion in assets (which although the latter was never used, helped stabilize the bank).
Bank of America is hardly an outlier. There’s JPMorgan Chase, which has $2.14 trillion in assets. Citigroup, recipient of $45 billion in direct bailouts and guarantees on more than $300 billion in assets, has $2 trillion. Wells Fargo, which got $25 billion from TARP, is also in the trillion-dollar club.
That $25 billion is more than the total assets of all the failed Georgia banks.
Then there’s Goldman Sachs at No. 5 with $880 billion in assets and Morgan Stanley at No. 6 with $819 billion.
What you say is true, the focus should be on the big institutions, but the goal is to increase the stability of the giants and decrease the opacity and recklessness of their risk taking. It's not just about size, it's about character.
And the small banks can provide insight into what kinds of regulatory systems produce bad characters.
Krugman contrasted the systems in Georgia and Texas:
http://www.nytimes.com/2010/04/12/opinion/12krugman.html
"Texas has managed to avoid severe stress to either its housing market or its banking system, while Georgia is suffering severe post-bubble trauma. The share of mortgages with delinquent payments is higher in Georgia than in California; the percentage of Georgia homeowners with negative equity is well above the national average. And Georgia leads the nation in bank failures.
So what’s the matter with Georgia? As I said, banks went wild, in a scene strongly reminiscent of the savings-and-loan excesses of the 1980s. High-flying bank executives aggressively expanded lending — and paid themselves lavishly — while relying heavily on “hot money” raised from outside investors rather than on their own depositors.
It was fun while it lasted. Then the music stopped.
Why didn’t the same thing happen in Texas? The most likely answer, surprisingly, is that Texas had strong consumer-protection regulation. In particular, Texas law made it difficult for homeowners to treat their homes as piggybanks, extracting cash by increasing the size of their mortgages. Georgia lacked any similar protections (and the Bush administration blocked the state’s efforts to restrict subprime lending directly). And Georgia suffered from the difference.
What’s striking about the contrast between the Texas story and Georgia’s debacle is that it doesn’t seem to have anything to do with the issues that have dominated debates about banking reform. For example, many observers have blamed complex financial derivatives for the crisis. But Georgia banks blew themselves up with old-fashioned loans gone bad...
So what’s the moral of this story? As I see it, it’s a caution against silver-bullet views of reform, the idea that cracking down on just one thing — in particular, breaking up big banks — will solve our problems. The case of Georgia shows that bad behavior by many small banks can do as much damage as misbehavior by a few financial giants.
And the contrast between Texas and Georgia suggests that consumer protection is an essential element of reform. By all means, let’s limit the power of the big banks. But if we don’t also protect consumers from predatory lending, there are plenty of smaller players — both small banks and the nonbank “mortgage originators” responsible for many of the worst subprime abuses — that will step in and fill the gap."
We need to limit their behavior, we need an active financial products consumer protection agency, and the too big to fail banks will shrink by virtue of their required limits and disclosure requirements. We need to look at examples of stable banking systems, be they in Canada or Texas, and emulate their good qualities. We need to change how we regulate the shadow banks if they are going to continue to act like banks in this post Glass Steagal world.
So the focus is right, focus on the big banks, but the means of focus needs to come from the small banks who didn't fail.
#1 Posted by Thimbles, CJR on Sat 22 May 2010 at 11:27 PM
in Ga there is a tremendous amount of fraud within the banking system. Integrity Bank should be the poster child of Ga Bank failures. bankalchemist.
#2 Posted by bankalchemist, CJR on Wed 10 Nov 2010 at 10:19 AM