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Smaller banks provide a reality check

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Bob Moon: On a day that top economists were telling Congress to go ahead and let big financial institutions fail, Wall Street chose to focus on the testimony at another Capitol Hill hearing. Treasury Secretary Timothy Geithner indicated most banks now have sufficient reserves on hand to cover possible future losses. He defended the agency’s $700-billion bank rescue plan. And he said the government’s bailout fund still has enough money to cover future needs.

But even as the Treasury secretary was speaking, several of the nation’s large regional banks issued worse-than-expected earnings. As Marketplace’s John Dimsdale reports, that raises questions about whether more banks will need more government help in the future.

JOHN DIMSDALE: The books of regional banks such as U.S. Bancorp, Comerica and M&T Bank are not clogged with the sorts of risky securities that drag down larger investment banks. But with their customers hit by unemployment and foreclosures, these smaller banks are beginning to feel the same sort of pain.

Last week, bigger banks reported better than expected profits. Some analysts were skeptical, pointing to accounting gimmicks and one-time events. Christopher Whalen with Institutional Risk Analytics says the finances of smaller banks are looking a lot worse.

CHRISTOPHER WHALEN: The regional banks are actually being more honest and more righteous in many respects than their larger brethren. The regionals are showing you what’s going on, which is that it’s a tough time.

With profits at some regional banks falling between 60 and 90 percent, Scott Valentin at FBR Capital Markets doesn’t rule out the need for future government help.

SCOTT VALENTIN: With further home price declines probably in the next couple quarters, unemployment going up in the Southeast, it presents a very challenging environment for these banks.

On the other hand, Christopher Whalen says smaller banks should bounce back more quickly than the large investment banks.

WHALEN: The little community banks with good funding that don’t have a lot of complex securities on their balance sheets, once they get through this particular crunch this year, and it will probably go through the whole year, they’re going to be very good value.

But not necessarily before they call on the government for some help weathering the storm.

In Washington, I’m John Dimsdale for Marketplace.

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