The weak-small-bank meme

By Felix Salmon
March 18, 2010
too puny to succeed" meme, as evinced today by Binya Appelbaum and David Cho:

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I’m not convinced about a the “too puny to succeed” meme, as evinced today by Binya Appelbaum and David Cho:

The Treasury Department invested in large and small banks during the financial crisis. So far, the big bets are paying off better than the smaller ones…

The missed payments totaled $78.1 million in February and that banks now have missed a total of $205 million in dividend payments to the government.

For one thing, no one is expressing that $205 million as a delinquency rate. Any set of loans will have some kind of delinquency rate; if the rate is lower than the rate of interest on the loans, the lender is in OK shape.

What’s more, these small banks sometimes turn out to be not so small after all:

The list of banks missing payments for the first time included South Financial Group of South Carolina and Citizens Republic of Michigan, both of which rank among the nation’s 100 largest banks, with about $12 billion in assets each.

The fact is that Treasury is going to make a profit on its TARP payments to banks, and that the biggest risks to the TARP fund come not from small banks but from large ones — not only South Financial and Citizens Republic, but also even bigger banks like GMAC.

And the biggest bailout of all was that of mortgage giants Fannie Mae and Freddie Mac; so far there’s no sure indication that they will be able to repay the government’s funds.

I don’t think that “too puny to succeed” is a real phenomenon — there are lots of perfectly successful small banks which make predictable and unspectacular profits year in and year out. If the bank is privately-owned, without shareholder pressure for constant growth, then it can stick to what it knows best and do well. Every so often, it’s true, what these banks do best is real-estate lending, and a big real-estate wipeout like we’ve just seen can fatally damage them. But even when that happens they’re small enough to fail and there’s little if any systemic risk.

With any luck, the Move Your Money campaign will help to keep new business flowing to small banks and credit unions, which don’t get blinded by ambitions of global domination and which don’t bring the entire economy down with them in the event that they do overstretch. There will always be bank failures — that’s a fact of any economy. The trick is to make sure that those failures aren’t contagious. And that’s almost impossible when the failing banks are of Lehman size or larger.


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too puny to succeed means that when a small bank makes the same stupid mistakes as a big one, nobody is going to bail them out. Small banks can survive as long as they don’t get greedy.

Posted by OnTheTimes | Report as abusive

TARP funding, following the initial “forced issuance” to JPM, C, GS, etc, was decided with polar opposite criteria–(i) large “systemically important” problem institutions near failing and (ii) small commercial banks that were deemed by the joint regulatory committee to be strong CAMEL institutions and an ability to repay.

That is TARP funds were given to those small banks that seemingly didn’t need it and could repay it.

So the real story here is not that small banks were and are too puny to succeed, but that the smaller banks should have better repayment metrics. Those that took TARP funds and have now subsequently deferred or defaulted, apparently either (i) lied on their TARP application (UCBH?), (ii) had overly optimistic marks on their assets, (iii) had a more lenient regulatory environment in late 2008, early 2009(e.g. certain state regulators and the OTS), or (iv) had some real, negative unseeb intervening variable that materially affected their assets. I would venture that most of the unpaid TARP funds at small banks are the result of some combination of (i)-(iii).

Posted by AABender1 | Report as abusive

I like local credit unions and avoid banks. Thanks, Felix, for these articles.

Posted by gramps | Report as abusive

What’s more scary, the Fed with more power or the Fed with more power?

Posted by Story_Burn | Report as abusive

In which country are “predictable and unspectacular profits year in and year out” acceptable? Well, that’s just un-American. The world is flat and we must compete globally. Right?

I’m all for predictable and unspectacular. How do we convince corporate America? We’re all about creative destruction. Predictable and unspectacular are eaten for lunch.

Posted by silliness | Report as abusive