Community
Bank Advantages Challenge Historical Assumptions
A bank's size alone can have less to do with its performance, safety and soundness than would be expected, based on A.M. Best's analysis of data from the Federal Deposit Insurance Corp. and other, qualitative factors. Various operating models carry key advantages and disadvantages, as Best delineated by a threshold of $5 billion in assets between small and large banks.
à ‚¬ Despite common industry perceptions that large commercial banks have greater safety and earnings power than community banks, a bank's assets don't necessarily equate to economies of scale, diversification of risk and market power.
à ‚¬ Small community banks generally have smaller scale and less diversification, but their local owner-managers provide stabil- ity, and they draw strength from focusing on their local commu- nities and limiting risk.
à ‚¬ Larger institutions historically have tended to take on more leverage and complex risk exposures, and they also may forego diversification to assume concentrated risk in certain regions or in certain products, such as subprime mortgages.
à ‚¬ Relative risk aside, community banks are better capitalized according to certain regulatory capital ratios, including the Tier 1 risk based capital and tangible common equity.
à ‚¬ Community banks are less susceptible to downswings in bank- ing cycles, as shown by more gradual declines in median return on assets and return on equity compared with larger banks.. (Full report with graphs)
Why is this not more widely understood? Well, ask the New York Times or most other large media outlets. They are always way behind the curve when it comes to reporting emerging financial news. Mostly they come along after each crash to explain to us everything they failed to warn of when it would have done some good. But if you look hard enough you can find some stories that support the Best study:
As big banks falter, community banks do fine
Christian Science Monitor --Unlike banks on Wall Street, these smaller banks didn't invest in risky mortgage-backed securities or complex derivatives....While they account for less than 10 percent of America's total banking assets, their traditional, values-based approach contains plenty of lessons for their larger Wall Street counterparts, some analysts say.
But there's another component as well, says William Attridge, president of the Wethersfield, Conn.-based bank: Most community bankers know their customers. "We're lending to small businesses, and in small businesses the individual is a significant part of that," he says. "There's a character component: That means we might make loans that possibly someone else wouldn't if they just looked at the financials, because we know the individual well and what their resources and talents are. On the other hand, there are probably some [loans] that look good on paper that we wouldn't make."
During the Great Depression, there were
more than 30,000 banks in the US, and most of them were small. The
majority of banks that failed were small, while the few bigger banks
that existed weathered the economic turmoil better. Today, the flip side is happening. Four
large banks were responsible for half of the $26 billion in losses
reported by the banking industry during the fourth quarter of 2008,
according to the Federal Deposit Insurance Corp. (FDIC). (Full Story)
Oh, and by doing this, you'll be doing your part in returning banking to its roots, keeping local savings working locally, rather than fueling multi-million dollar bonuses and fueling the next financial bullshit-bubble.
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