Crisis may not be over for banking small fry

By Rob Cox
December 28, 2009

Rob Cox 55x64 jpg.ashxDuring the financial crisis it appeared that America’s small banks could do no wrong. President Barack Obama said the world would’ve been better off if the entire financial system had been more like them. Legislators tried to ease their burden, often at the expense of their bigger competitors. Community bankers even won a meeting last week with the president to try to convince him to reduce regulatory red tape.

But while it’s true that the nation’s 8,000 small banks avoided the worst excesses of their mega rivals and are healthier, they’re not yet out of the woods. Most of the 140 banks that have failed were small and regulators expect more to follow. As Bank of America, Citigroup and other hulks of the financial firmament have shored up their balance sheets, the small bank fraternity could see more pain ahead.

Take net charge-offs as a percentage of average loans, a measure of the relative health of loan portfolios. For banks with less than $5 billion of assets, these amounted to just 0.25 percent in the third quarter, compared to 1.53 percent at larger banks, according to SNL Financial. But the percentage actually declined somewhat from the second quarter for the big banks and rose by a quarter for the small ones.

One of the biggest problems smaller banks face is their higher exposure to commercial real estate, a sector that investors expect has further to fall. That could result in greater asset write-downs for this heretofore healthier corner of banking. Losses on real estate could lead to more failures and easily stymie lending, particularly to smaller businesses.

Though they account for less than 12 percent of banking assets, financial institutions with less than $1 billion of assets make nearly a third of all loans of $1 million or less to businesses, the Independent Community Bankers Association says. Less lending could have powerful knock-on effects for an economy already struggling to rebound.

For now, America’s smaller banks have more capital, make more on their assets and have fewer problem loans. But as defaults in the commercial real estate arena begin in earnest next year – and consumers continue to feel the economy’s pinch – the relative fortunes of the small fry and leviathans of finance will almost certainly converge.

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