Too Small to Fail

TOO SMALL TO FAIL…. The impact of the financial crisis on the banking industry has been pretty obvious, with most of the financial services industry in turmoil. But there’s part of this story that’s been largely overlooked: humble local banks are doing quite well, thank you.

In the soon-to-be-released issue of the Washington Monthly, Phillip Longman, a senior fellow at the New America Foundation, and T. A. Frank, an Irvine Fellow at the New America Foundation and an editor here at the Monthly, highlight the surprising resilience of smaller, local banks in a terrific piece that is now available online.

Easily overlooked amid the crisis of big banks today, small-scale financial institutions are, for the most part, holding steady — and sometimes even better than steady. According to FDIC data, the failure rate among big banks (those with assets of $1 billion or more) is seven times greater than among small banks. Moreover, banks with less than $1 billion in assets — what are typically called community banks — are outperforming larger banks on most key measures, such as return on assets, charge-offs for bad loans, and net profit margin.

Longman and Frank also explain how smaller community banks and credit unions remained solvent and profitable (and continue to make loans) through old-fashioned “relationship” banking, while the Wall Street behemoths were “efficient” mainly at wasting trillions of dollars in global capital.

Perhaps most importantly, their piece explains what lessons are available to policy makers from these trends, as a new global finance architecture comes together. Take a look.

What’s more, Longman and Ellen Seidman, director of financial services policy at New America, who contributed substantially to this article in the Monthly, will participate in a forum tomorrow at the New America Foundation discussing the points raised in the piece, and answering questions on the subject. For readers in the D.C. area, here’s a link to the schedule for Thursday’s event. If you’re outside the beltway and want to tune in, there will be a live webcast. The event begins at 12:15 p.m. eastern.