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Small Banks Need Not Hope For the Bailout Plan

hope for small banks?Ailing small banks can only find one solution. Sadly, it won’t come from the government.

Controversy erupted over the Treasury Department’s nod to PNC Financial in its bid to be assisted by the bailout plan fund. This comes after it rejected ailing financial holding firm National City Corporation (NCC). The Cleveland-headquartered bank was struggling heavily in the past months with $20 million in losses on sour mortgages.

The government is accused of using the funds to allow large banks to acquire smaller institutions and regain their dominance even in an uncertain economy. As the trend of bank mergers continues, the rescue plan is put into question if it discriminates against small banks. Elizabeth Williamson of The Wall Street Journal interviewed officials from small industry, players who were crying foul over the government’s inability to resolve the problem. The Treasury Department has decided to grant taxpayer money for whatever the recipient bank decides to do. That includes using billions of dollars to buy up rival banks. Critics argue that the bailout’s mail goal should be to rescue bad mortgages and not to further capitalization on eventual mergers.

However, mergers provide product diversification, which reduces the risk and volatility of earnings, according to a study by John Sherman, senior financial analyst at the Federal Deposit Insurance Corporation. Costs are also brought down by taking advantage of economies of scale, he said.

In PNC Financial’s case, though, we see that its risk exposure could be higher than expected since it has to consolidate $20 million in its existing portfolio. The Federal Housing Authority’s “Hope for Homeowners” started slowly, generating less than 1 percent in applications. In fact, JPMorgan Chase’s mortgage modification program is still in the testing phase. In other words, NCC could have been backed by the government instead of PNC, therefore averting a loss of workers due to overlapping duties and consolidating diversified portfolios from two institutions.

There’s no point in infusing rescue funds if it only results in merger capitalization instead of loan restructuring, the original intent of the rescue plan. There’s still less deregulation in a federal agency that needs stronger oversight for the use of taxpayers’ money. It appears the Treasury needs to fix its own mess first before aiding the industry.

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