"In 2009, 45 Percent of Banks with Assets Under $1 Billion Increased Their Business Lending" → Washingtons Blog
"In 2009, 45 Percent of Banks with Assets Under $1 Billion Increased Their Business Lending" - Washingtons Blog

Thursday, March 25, 2010

"In 2009, 45 Percent of Banks with Assets Under $1 Billion Increased Their Business Lending"

Thomas M. Hoenig - president of the Federal Reserve Bank of Kansas City and the current longest-serving regional Fed chief - said in a speech at a U.S. Chamber of Commerce summit in Washington:

During the recent financial crisis, losses quickly depleted the capital of these large, over-leveraged companies. As expected, these firms were rescued using government funds from the Troubled Asset Relief Program (TARP). The result was an immediate reduction in lending to Main Street, as the financial institutions tried to rebuild their capital. Although these institutions have raised substantial amounts of new capital, much of it has been used to repay the TARP funds instead of supporting new lending.

On the other hand, Hoenig pointed out:

In 2009, 45 percent of banks with assets under $1 billion increased their business lending.

45% is about 45% more than the amount of increased lending by the too big to fails.

This confirms my previous argument that the small banks will lend, if we stop the too big to fails from growing even bigger and stifling all competition:

Do we need to keep the TBTFs to make sure that loans are made?


Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks' current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:

Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...

As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners...

At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks...

Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks," says Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers."

And Fed Governor Daniel K. Tarullo said in June:

The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks...

For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.

Indeed, some very smart people say that the big banks aren't really focusing as much on the lending business as smaller banks.

Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks' own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don't really need credit in the first place. See this and this.

So we don't really need these giant gamblers. We don't really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

The largest banks often don't show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.

"They actually experience diseconomies of scale," Narter wrote of the biggest banks. "There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size."

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries--to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.

A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.

It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the "too big to fails" are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.

Hoenig also pointed out in numerous other ways that the too big to fails have to shrink or financial crises will keep on happening.

So what are our political "leaders" doing?

As shown by well-known economist Simon Johnson, worse than nothing:

The indications are that some version of the Dodd bill will be presented to Democrats and Republicans alike as a fait accompli - this is what we are going to do, so are you with us or against us in the final recorded vote?


Of course, officials are lining up to solemnly confirm that "too big to fail" will be history once the Dodd bill passes.

But this is simply incorrect.


Why exactly do you think big banks, such as JP Morgan Chase and Goldman Sachs, have been so outspoken in support of a "resolution authority"? They know it would allow them to continue not just at their current size - but actually to get bigger. Nothing could be better for them than this kind of regulatory smokescreen. This is exactly the kind of game that they have played well over the past 20 years - in fact, it's from the same playbook that brought them great power and us great danger in the run-up to 2008.

When a major bank fails, in the years after the Dodd bill passes, we will face the exact same potential chaos as after the collapse of Lehman. And we know what our policy elite will do in such a situation - because Messrs. Paulson, Geithner, Bernanke, and Summers swear up and down there was no alternative, and people like them will always be in power. If you must choose between collapse and rescue, US policymakers will choose rescue every time - and probably they feel compelled again to concede most generous terms "to limit the ultimate cost to the taxpayer" (or words to that effect).

The banks know all this and will act accordingly. You do the math.

Once you understand that the resolution authority is an illusion, you begin to understand that the Dodd legislation would achieve nothing on the systemic risk and too big to fail front.

On reflection, perhaps this is exactly why the sponsors of this bill are afraid to have any kind of open and serious debate. The emperor simply has no clothes.

Indeed, Johnson has previously said that recovery will fail unless we break the financial oligarchy that is blocking essential reform, and he has called the U.S. a banana republic.

High-level Fed officials - including Hoenig - agree.

Congress and the White House won't do anything to stand up to the oligarchs because they are fully bought and paid for . The oligarchy is trying to make us serfs, and our politicians (with a few notable exceptions) are helping.

Remember, it is the government which created the too big to fails. Now, politicians are covering for them with legislation that sounds good ... but really just helps the too big to fails get even bigger.

Unless the people confront the oligarchs directly (plus stop feeding the tapeworm), the nation will be lost.


  1. While this is all valuable information, I think the conclusions are a bit strained, -even silly?

    Let us just see.

    1) Lending cannot drive an economy. Lending is parasitic -at best. Lending is one of those things banks do -to make money- when times are good. When times aren't good, banks lose money lending. -End of that part of the story.

    2) Stimulus cannot drive an economy. An economy typically grows more like a plant than a shock wave. The vast majority of the stimulus money (or bail-out money -as it were) has ended up in one of two places. First, overseas, -and- second, under the mattresses of Wall Street insiders who are awaiting the realization (called capitulation) that depressions cannot be chased away by economic stimulus.

    This was well-evidenced in the last great depression.

    3) Just because the smaller banks are lending more, doesn't necessarily equate to economic recovery -or its widely fantasized possibility. It actually means quite the opposite.

    The TBTF banks are in total control. Anyone who denies this, is caught-up in some kind of fantasy-land.

    The TBTF banks are racking up huge gains in the size of their importance, if not in the net nature of their solvency as economists and bookkeepers -like to measure it.

    When the time comes, (-shortly-), the most amount of money to be made in this "fragile" economy, will tempt the TBTF banks to again pull the trigger, firing the bullet, that dislodges the plug -only temporarily- covering the economic drain hole -they have exclusive control over.

    When they pull that trigger, the wisdom of the small banks will be flushed up in their red faces like a grouse from the bush. Their debtors will crumble by the wayside leaving these smaller (but just as greedy) banks -gaunt and sickly, easy targets and -cheap- acquisitions.

    The TBTF banks are right now rigging the system again -so that the greatest amount of money to be made, is going to be made by pulling the trigger and consequently -dislodging the plug again.

    Trust me when I say -this is not a long term wait we are in for -to verify- the veracity of what I am saying here about the other shoe dropping in this depression.

    We have all seen the chart of what happened during the so-called Great Depression.

    A lot of people made a lot of money then, as they will again this time, knowing exactly the timing of the repeated collapses that historically occur in depressions.

    Pardon my extemporizing here on human nature, and more particularly the nature of science as it has developed since the Enlightenment, -but- I think the common problem here is, -neither government, business, nor economists have a moral bone in their body.

    There is no -moral constant- to what these-often-fanatical-believers-in-the-scientific-methods-of-today ascribe to their delusional reality as they go about their daily chores in this fantastic and ongoing -Scientific Inquisition- that kills with such utterly reckless disregard -so very many innocent souls all over the world.

    Take off your blinders. You will see. Reality is not scientific at all, -not in any sense.

    Our reality is defined by human nature, which is still very primitive, crude, and disturbingly -irrational-.

    Jack Nicholson in -The Shining- when he's limping around the old place with his ax -comes to mind.

  2. "Lending is parasitic -at best".

    That's not totally correct: at best it serves to inject "virtual" resources (i.e. money, not too different from a rationing card, just less rigidly regulated) into the pioneering sectors of the economy.

    Of course all this requires the existence of markets and money and could, at least in theory, be implemented by some other means, more bureaucratic or even more directly democratic maybe. But within this paradigm, lending to creative actors is central to the economy.

    Additionally it also offers the possibility of less creative buying in advance, though this kind of credit has been brought to incredibly poisonous extremes, in destructive symbiosis with real state crazy speculation specially.

    I mostly agree with the rest of your comment, Anonymous, even with your claim of humans being largely irrational. However there is rationality and calculations indeed and those banksters have done their homework, even if ethics are, of course, out of their equations. As for the rest, rather than "The Shining", I imagine them better in "They Kill Horses, Don't They?", a great allegory of Capitalism.


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