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Why Small Banks are at the Helm of the Recession

More banks fall into losses.

Three banks have shut their doors after the Federal Reserve reported that Cooperative Bank of Wilmington, NC, Southern Community Bank of Fayetteville, GA and First National Bank of Anthony, KA cannot keep up with their operations. The recent bankruptcies bring the total number of failed banks to 40 this year. According to the New York Times, the three banks will be acquired by First Bank of Troy, N.C., United Community Bank of Blairsville, GA and Bank of Kansas in South Hutchinson respectively. So are small banks already this vulnerable to economic downturns? In December 2008, economists Philipp Longman and T.A. Frank wrote in Washington Monthly, “One reason community banks are doing so well right now is simply that they never became too clever for their own good. When other lenders, including underregulated giants like Ameriquest and Countrywide, started peddling ugly subprime mortgages, community banks stayed away. Banking regulations prevented them from taking on the kind of debt ratios assumed by their competitors, and ties to their customers and community ensured that predatory loans were out of the question.”

But that was a more than five months ago. The recent string of bankruptcies doesn’t seem to be holding down. Federal Reserve Bank of St. Louis economists Andrew Meyer and Timothy Yeager mention in their research paper entitled, “Are Small Rural Banks Vulnerable to Local Downturns?”, “If local economic activity affects bank performance, this association is more likely to be evident in the data for small banks with offices in rural areas than for other banks. Smaller banks (as measured by assets) typically have more geographically concentrated operations and, due to their lower levels of capital, lend to smaller, less diversified businesses. Therefore, the performance of small banks may depend more heavily on local conditions.” It’s clear therefore that we have a rising number of small banks giving in to the pangs of recession.

These small banks do not deserve to be eaten up by large financial institutions. After all, there is still a good number that have resisted the credit crisis by focusing on community loans instead of following what JPMorgan and Wachovia have committed.

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