Marketplace Scratch Pad

Small banks vs big ones

Scott Jagow May 27, 2009

We got an update today on the health of the banking system. The FDIC said overall, US banks made $7.6 billion in profit for the first quarter, compared to the fourth quarter’s record loss of $36.9 billion. But as we suspected when the bank earnings first came out, there’s trouble lying in wait.

From the Wall Street Journal:

Though banks were profitable, there were signs that the credit crisis continues to take its toll. The number of banks on the FDIC’s “problem” list climbed to 305, the highest level since 1994, and the number of loans more than 90 days past due climbed across all major loan categories.

“The first quarter results are telling us that the banking industry still faces tremendous challenges,” FDIC Chairman Sheila Bair said in prepared remarks. “And that going forward, asset quality remains a major concern.”

The real value of the assets on bank books is still unknown, but many, many bad loans are still out there. Bair also said the FDIC’s insurance fund is down 25 percent to its lowest level in 15 years. Last week, the FDIC’s board voted to levy new fees on banks to raise more money for the fund.

National banking regulator John Dugan voted against the plan. He argued the FDIC’s cash problem lies, not with big banks, but with small, community banks that did too much commercial real estate lending. Washington Post columnist Steven Pearlstein rightly takes Dugan to task on that point:

Inconveniently for Dugan, his dissent was lodged on the very day that the FDIC took over Florida’s giant BankUnited, at an expected cost of $5.3 billion, equal to the cost of all 30-odd small bank failures so far this year. And last year the FDIC’s $11 billion rescue of IndyMac, the giant California thrift, accounted for well over half of the $17.9 billion losses in 2008.

But what’s particularly absurd about Dugan’s argument is that it ignores the reason there haven’t been more failures of big banks — namely that these banks were prevented from failing by a Treasury and Federal Reserve wielding sums of money so large that they dwarf anything the FDIC might spend cleaning up after community banks.

Exactly. I’m sure we’ll see more small banks fail, probably in large measure because of their own doing. But it’s preposterous to champion the “health” of large banks like Citigroup and Bank of America. They were propped up with billions of taxpayer dollars, and they still might suffer the same fate as the smaller banks that seem so expendable in this system.

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