Community Banks Lose as Big Banks Consolidate
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The Fiscal Times
December 22, 2011

This weekend, in an annual holiday ritual, millions of Americans will gather round the widescreen to watch “It’s A Wonderful Life.” In that 1946 Frank Capra classic, the down-on-their-luck but still plucky residents of Bedford Falls pool their money to bail out, er, stop the run on George Bailey’s savings and loan, and prevent their town’s decent into a dismal swamp of shuttered homes, gambling casinos and raucous taverns. In George’s bad dream, they were taken over by a foreclosing Mr. Potter, the fictional archetype for Occupy Wall Street’s one per cent.

Alas, real life doesn’t have a Hollywood ending. Lenders like Countrywide took over the home mortgage business by giving subprime and teaser rate loans to struggling families seeking to put a first foot on the economic ladder. Pottervilles dot the landscape with foreclosed homes, homes under water, and high jobless rates. Meanwhile, desperate states see casino gambling as a path out of their budgetary woes and no one’s gone to jail.

And what has happened to our latter-day Bailey Savings & Loans? They are disappearing almost as fast as torn wrapping paper on the day after Christmas.

In an acceleration of a trend that has been underway since the early 1990s, the U.S. lost 932 financial institutions or nearly 13 percent of the total since the onset of the Great Recession, according to the latest data from the Federal Deposit Insurance Corporation. The vast majority of those closed institutions had less than $1 billion in assets. They were mostly locally-owned, community banks that were often the backbone of small business lending in their communities.

On the other end of the spectrum, the top 106 banking institutions – those with over $10 billion in assets – now hold nearly 80 percent of the nation’s $13.8 trillion in financial wealth. The 116 institutions that qualified as mega-banks in 2007 held just 77 percent of $12.7 trillion in assets. There’s no chance that the trend will reverse itself since there has been an almost total collapse of new applications for bank charters. In the past year there were even two quarters when there were zero applications – an unprecedented event in the 77-year history of the FDIC.

There were only three applications for new banks in 2011, down from the 100 to 200 that characterized most years. During the savings and loan crisis of the early 1990s, by contrast, applications for new financial institution charters never fell below 50 a year. “We haven’t had a recession quite this severe since the Great Depression, so we’re not getting as many applications in,” said Serena Owens, associate director for risk management supervision at FDIC. “And those we take in we have to look at their economic prospects for success. It’s hard to justify when we’re seen so many that failed.”

The FDIC has closed 74 failing banks this year. While that’s down from 157 in 2010, the number of “problem institutions” with high ratios of non-performing loans and inadequate capitalization remains high. There are currently 844 financial institutions on the FDIC’s watch list, down just 40 from a year ago. “Non-performing loans . . . are still up around the levels of the early 1990s,” said Richard Brown, chief economist at FDIC. “It’s the real estate loans, mostly 1 to 4 families. Non-performing loans at 9.7 percent is far higher than we’ve seen historically.”

Yet many small banks have repaired their balance sheets. And with very low cost of funds – the rates they pay depositors – it should be an ideal time to resume lending. Moreover, would-be banking entrepreneurs at similar points in past economic cycles have started new banks in areas that were underserved. But it’s not happening. “There isn’t that much capital that’s interested,” Brown said. “Even where capital ratios are high, we hear bankers telling us that it’s hard to find credit-worthy borrowers.”

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.