Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Breaking Views

Trouble ahead for community banks

By Rob Cox, breakingviews.com

(breakingviews.com) -- During the recent financial crisis it appeared that America's small banks could do no wrong. President Barack Obama said the world would have been better off if the entire financial system had been more like them.

Legislators tried to ease their burden, often at the expense of their bigger banking competitors. Last week, community bankers even won a meeting with the president to try to convince him to reduce red tape on their part of the industry.

But while it's true that the nation's 8,000 small banks mostly managed to avoid the excesses of their mega rivals and are healthier than big ones, they're not yet out of the woods.

A majority of the 140 banks that have failed were small -- and most on regulators' watch lists have less than $10 billion in assets. As Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and other problem hulks of the financial firmament have shored up their balance sheets and exited the government's bailout scheme, the small bank fraternity could see more pain ahead.

Take net charge-offs as a percentage of average loans, a measure of the relative health of loan portfolios. For banks with less than $5 billion of assets, these amounted to just 0.25% in the third quarter, compared to 1.53% at larger banks, according to SNL Financial. But the percentage actually declined somewhat from the second quarter for the big banks and rose by a quarter for the small ones.

One of the biggest problems smaller banks face is that they generally have higher concentrations of their loan books in commercial real estate, a sector that investors expect has further to fall. That could result in greater asset writedowns for this heretofore healthier corner of the banking world. Losses on real estate could lead to more failures and easily stymie lending, particularly to smaller businesses.

Though they account for less than 12% of all American banking assets, financial institutions with less than $1 billion of assets make nearly a third of all loans of $1 million or less to companies, according to the Independent Community Bankers Association, eight of whose members met President Obama last week. Less lending from such banks could have powerful knock-on effects for an economy struggling to rebound.

For now, America's smaller banks have more capital, make more on their assets, and have fewer problem loans. But as defaults in the commercial real estate arena begin in earnest next year -- and consumers continue to feel the economy's pinch -- the relative fortunes of the small fry and leviathans of finance will almost certainly converge. To top of page

Company Price Change % Change
General Electric Co 26.82 1.35 5.30%
Dow Chemical Co 46.31 1.86 4.18%
Bank of America Corp... 15.69 0.31 2.02%
Micron Technology In... 17.60 1.69 10.62%
Apple Inc 110.78 0.40 0.36%
Data as of 4:00pm ET
Index Last Change % Change
Dow 16,776.43 304.06 1.85%
Nasdaq 4,781.26 73.48 1.56%
S&P 500 1,987.05 35.69 1.83%
Treasuries 2.06 0.07 3.37%
Data as of 4:32pm ET


Critics says it'll ship more jobs overseas, advocates say it will increase U.S. exports and good paying jobs that go with them. Here's a look at the Trans-Pacific Partnership, or TPP. More

The number of people living in extreme poverty is set to fall to under 10% of the global population for the first time in 2015, the World Bank said. More

Smarties, a Halloween candy staple, have been around for 66 years. Three Millennial women are revolutionizing it. More