With over 140 bank failures in 2009 alone, it goes without saying that this has been one of the most challenging years ever faced by banks. Banks of all sizes have fallen in the economic storms and challenges in the capital markets but recently the bank failures seem to be limited to small, community banks as opposed to large national and regional banks and financial institutions.
President Obama met with officials from eight community banks recently and found them much more willing to work toward a common solution than the CEO’s of large banks that flew into Washington for meetings a few weeks ago. Instead of worrying about maximizing the size of their bonuses, these banking leaders are simply struggling to keep their doors open as the FDIC looks for new targets that are under-capitalized. There are a few reasons why smaller banks face a more difficult battle emerging from the recession.
– Industry Consolidation: There has been consolidation of banks of all sizes as bank failures have increased over the past year. The FDIC’s website has a list of bank failures and many of the assets of those fallen banks have been assumed by other small community banks. Consolidation among the behemoths in the banking industry has made it difficult for small banks to compete. Currently there are fewer than 1200 banks in the nation with less than $50 million in assets. Just 15 years ago, there were nearly 5000 banks of this size.
There is also a sense that the government is willing to let small banks fail but will rescue large banks as they need financial help. As bank customers perceive this trend, many are feeling safer moving their deposits to larger institutions that seem to have the backing of the federal government. The largest five banks currently combine to hold 37% of all deposits in the US, more than triple the amount held by the largest five banks 15 years ago.
– Cautious Lending Environment: Community banks are the backbone of small business lending in many areas. Bank regulators continue to pressure banks to maintain higher lending standards than in the past and many smaller banks are finding that their loan volume is falling because of a reduction in qualified applicants. Still, almost a third of small business loans of less than a million dollars are made through community banks, so there place will continue to be important in a recovering economy.
- Difficult Capital Environment: When a bank like Citigroup or Wells Fargo needs to raise capital, they can go to the capital markets, issue stock, and increase their capital base by billions of dollars. Small, community banks don’t have this luxury and when their capital levels fall below acceptable standards, they are simply shut down and consolidated into bigger banks. Private investors who have the capital to support banks in need of cash infusions are sticking to the big name banks because of the perception that the biggest banking names are “too big to fail.” Raising new funds will continue to be a challenge for community banks.
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