All the Banks in Georgia

Small-bank failures are child's play in a too-big-to-fail world

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.

Plus, there are far more small banks than big banks. So you’re going to inevitably have far more small-bank failures than big-bank failures.

Again, I don’t think anybody’s saying that small banks don’t have serious problems, and they sure shouldn’t get a pass on regulatory reform.

But it’s a relative thing. The big banks and the unregulated shadow banking system are where the real systemic issues lie, and that’s why the focus should be on them.

Further Reading:

Coverage of TBTF Amendment FAIL Fails

Krugman’s Too Big to Fail Straw Man

Too Big to Fail and Reform

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.