Too Small to Survive: Impact of the Recession on Neighborhood Banks

The impact of the recession could not be more devastating than it has been for the banking industry. While Bear Stearns and Merrill Lynch were able to narrowly escape extinction, there were hundreds of local banks that struggled to survive the volatility stemming from the steep recession. Since 2007, when the recession is alleged to have begun, as many as 348 banks have failed. That translates to over $651 billion in aggregate assets, and a staggering $76.1 billion in FDIC payouts to depositors.
In 2010 alone 157 neighborhood banks across the country were forced to shut their doors, accounting for over 45% of the total number of banks that have failed during this recession. Apparently by default, they were too “small to succeed”. Totally passed over for TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government.

It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys when they were passing out survival kits in the form of Cash. While it is primarily the small commercial banks, who make up over a half a trillion dollars in assets now lost. Meanwhile, politicians and lawmakers fail to realize that the small, neighborhood banks are the backbone of communities throughout the country. It is the small bank that often provides construction and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. Although the economists proclaimed the recession was officially over in 2009, this year has already seen 23 banks shut down, and we are only in the first quarter.

Given the role of Banks in the near collapse of the financial markets, it is difficult to defend their position, particularly when they continued to distribute huge bonuses in the wake of the crisis. Nevertheless,it is not realistic to perceive that the small commercial banks were involved in packaging and selling large volumes of toxic collateralized loans (one of the key causes of the financial crisis).

Neighborhood banks are a vital part the economic vitality of the communities they serve. They are responsible for fostering business development and growth, while stimulating the local economy. This is an unfortunate fallout from the recession that is clearly a travesty, but surprisingly remains under-reported. Without a small bank association, lobbyist or public figure advocating for the plight of the small bank, there has not been much attention drawn to this matter.
See interesting article about Small Banks being co-dependent.

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K. Reilly
The Cohn-Reilly Report