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Tags: Fortune | Regulators | Banks | Troubles

Fortune: Regulators Ignoring Small Banks' Troubles

By    |   Sunday, 02 June 2013 12:49 PM EDT

Unemployment is improving and stock markets are at record highs, yet a large number of banks – mostly small ones – are still in trouble.

There are still 612 banks in danger of failing, according to the FDIC. That's down roughly 30% from 884 in 2010 at the peak of the recession but up sharply from only 53 in early 2007.

The average bank in danger of failing has less than $350 million of assets, down from more than $450 million two years ago, reports Fortune magazine.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Meanwhile, regulators say the financial health of megabanks is improving.

The divergence could be due to the influence of large banks and new banking regulations. Regulators don't seem to care about small banks as much as they have in the past, perhaps because small banks aren't as important anymore, according to Fortune.

When it came to small banks, government bailout funds were a failure, says the magazine, noting that the Government Accountability Office said 107 of the banks on the FDIC's problem list received government bailout funds.

Ironically, banks that received government help lent less than banks that didn't get bailout money, Fortune says, citing SIGTARP, the government agency policing the program.

"Worse, the government has been ditching its stakes in small banks as fast as it can, despite the fact that many of those banks are still troubled," writes Stephen Gandel, Fortune senior editor.

New regulations are frequently blamed for hurting community banks.

Although the small banks did not cause the financial crisis, they find it more difficult to meet new regulations, writes Camden R. Fine, president and chief executive officer of the Independent Community Bankers of America, in an editorial for Bloomberg.

Large banks have the lowest credit quality and the lowest cost of funds, he says. Meanwhile, megabanks benefit from a government subsidy that Bloomberg View estimates at $83 billion a year.

"This is morally wrong - and bad economic policy. Community banks should be putting their capital to work in the small towns, rural communities and middle-class urban enclaves they know well. Instead, they are focusing too many of their precious human resources on onerous paperwork and time-consuming compliance measures."

To lighten the regulatory load and encourage lending, Fine argues, Congress should exempt small banks from certain mortgage rules, cut red tape in small business lending, require cost-benefit analysis by regulators, and waive certain audit rules, and eliminate the annual requirement on no-change privacy notices.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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Unemployment is improving and stock markets are at record highs, yet a large number of banks – mostly small ones – are still in trouble.
Sunday, 02 June 2013 12:49 PM
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