Sunday, December 6, 2009

Big Banks seem to be doing just fine: Smaller Banks, not so well

Last month it seemed as if there was a glimmer of hope for the smaller banks: lending appeared to be picking up across the board. (See my November 9 post, “A Positive Trend in Small Bank Lending”:

Well, the glimmer of hope went away in November. However, lending, and profits, at the larger banks seemed to become more robust as we went deeper into the fall.

Overall, bank liquidity continued to rise as the cash assets in the commercial banking system rose by $290 billion in the latest 13-week period and by $110 billion in the last 4-week period. This increase was, of course, reflected in the aggregate bank data. The Federal Reserve showed that Reserve Balances with Federal Reserve Banks averaged $833 billion in the banking week ending August 26, $1.085 trillion in the banking week ending October 28, and $1.139 trillion in the banking week ending December 2. Excess reserves in the banking system averaged $795 billion, $987 billion, and $1.120 trillion for the two-week periods ending, August 26, October 21, December, respectively. The banking system became more liquid as the fall matured.

Whereas, lending in the smaller banks showed some rise in October, lending was down across the board in the November period and this seemed to drag down the results from the last 13-week period.

The leader in this decline was lending for Commercial Real Estate. Analysts have claimed for some time now that problems were looming in this area for the small- and medium-sized banks. The concern was over timing: when were the problems being experienced by this sector going to show up on the balance sheets of these banking organizations?

Well, they really seem to be showing up now. Commercial Real Estate loans on the balance sheets of “small” domestically chartered commercial banks declined by $33 billion in the 4-week period ending November 25. They dropped by $50 billion in the last 13-week period.

Commercial and Industrial loans also decreased at the smaller banks in the latest 4-week period by $23 billion. (These loans actually had increased in the previous nine weeks.)

Furthermore, as stated in my December 1 post, these small- and medium-sized banks are not doing well profit-wise. The F. D. I. C. reported that commercial banks of $1.0 billion in assets size or less roughly broke even profit-wise in the third quarter of 2009. Banks in the $1.0 billion to $10.0 billion in asset size lost, on average, $3.0 million per bank in the third quarter.

The problem bank list, which consists primarily of small- and medium-sized banks rose to 552 at the end of the third quarter, an increase from a total of 416 at the end of the second quarter, and this is with 50 banks dropping off the list in the third quarter because they failed. (This information is reported in

The blip upwards in lending at the small- and medium-sized commercial banks reported last month is typical of the information flows we are getting these days. Some months the information that is reported looks good and we get excited about it. The next month…well, the information isn’t so good. The concern with the smaller banks is that the future could really be quite bleak.

With 552 banks on the F. D. I. C. problem list, we could see the banking industry taking a lot of hits in the next 12 months or so. If one-third of these banks fail, which is the estimate going around, this would mean that 184 of these banks would be closed or, in a 12-month period, roughly 3.5 banks per week would be closed. In the third quarter of 2009 three banks a week, on average, were closed. And, this assumes that no other banks come onto the problem bank list.

What about the big banks?

The big banks, except Citigroup, seem to be doing just fine. Even Bank of America is going to pay back the money it received from the federal government and it has raised additional capital.

Evidence that big banks are doing OK is present in the F. D. I. C. data just released. Commercial banks with assets in excess of $10 billion reported profits, on average, of $42 million per bank in the third quarter.

This prosperity seems to be translating itself into the performance of these larger banks. The assets of large commercial banks rose by $202 billion in the last 4-week period, whereas total assets actually dropped in the smaller banks and in foreign-related banking offices.

Loans and leases at the bigger banks surged by $163 billion in the last four weeks. This is the first substantial increase in activity in these banks this year!

Whereas the increase in loan volume was registered in all categories of loans, of particular note was an increase in Real Estate loans of $125 billion. And, the increase was distributed across residential mortgages, $80 billion, commercial real estate loans, $29 billion, and home equity loans, $16 billion. Business loans and consumer loans lagged these totals, but increased by $12 billion and $10 billion, respectively.

The bottom line:

Big banks, in general, seem to be doing very well;

Small- and medium-sized banks, in general, are not doing so good.

This presents quite a dilemma for the Federal Reserve. The bailouts of the big banks have seemingly worked. The big banks were saved from the systemic risk that existed within the financial system (yes, Mr. Goldman Sachs, you too would have failed if we had done nothing—Tim Geithner) and are now doing quite well. The Fed’s policy of keeping short term interest rates close to zero seems to be lining the coffers of these banks in record amounts.

The small- and medium-sized banks are another issue. These organizations, on average, do not seem to be making profits yet. Their loan losses really seem to be piling up and more is going to be asked of them in terms of reserves in anticipation of further losses. External capital does not seem to be readily available to them. And, they have more than 25% of their assets in cash and securities to help them through this period and to be able to pay off their own debt as it matures.

The Federal Reserve must take the condition of these smaller banks into consideration when considering a way to “exit” from its bloated balance sheet. Too quick of an exit could just exacerbate a situation that is already taxing the resources of these institutions.


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