Small Banks Vs. Big Banks

The Wall Street Journal did a study of 940 smaller banks and concluded that commercial real estate loans could generate losses of $100 billion by the end of next year. The WSJ’s analysis used the loan-loss criteria that the Fed used in its stress tests of the largest banks. The Financial Times did a similar analysis recently. There is nothing new or shocking about this analysis. The high likelihood of many small bank failures due to commercial real estate exposure has been floating around in the news for some time.

The FDIC, the government entity charged with seizing failed banking institutions is at least attempting to be proactive. It is weighing levying a one-time fee to replenish the agency’s deposit insurance fund that would hit big banks harder than small banks. The deposit insurance fund has been whittled down to $19 billion at the end of 2008, but there have been around 25 bank failures already this year, so clearly, the agency will run out of moola if it doesn’t do something soon. The new proposed fee is to be $.05 for every $100 of assets after deducting certain capital holdings. In February the FDIC had proposed a $.20 fee for every $100 of deposits, but smaller banks didn’t like this proposal because they felt they were being unduly punished for the financial crisis, which they contend was primarily caused by the big banks. Executives at the big banks counter that almost all of the banks that have failed in the past 18 months have been small institutions. I’m curious which large bank executive the WSJ interviewed to get that quote and could he have possibly said it with a straight face? Was it Vikram Pandit? Ken Lewis? Can you possibly make such a ridiculous assertion after your institution has received multiple billions in direct capital infusions, the ability to issue government guaranteed debt, and the ability to finance ANY collateral including equities via the Fed? Sure most of the banks that have failed have been small, but that’s only because the government has absolutely no mechanism for seizing large banks and chose to prop them up indefinitely instead.

Meanwhile, the folks at Goldman Sachs, JPMorgan Chase, American Express and Morgan Stanley are itching to repay the TARP. The authorities have decided to allow a group of banks to return the funds rather than approving individual applications to avoid a “rush to the exits,” whatever that means. I’m all for banks repaying the TARP. I never wanted government money involved in our banking system to begin with. Here’s the deal, though, they shouldn’t ever get the money back for any reason. Ever. The government should make it clear. Next time you are on the brink, we’re going to allow you to fail. Period. And if the government doesn’t have a mechanism in place to deal with a large institution’s failure, then it’s too soon to allow them to pay the money back.