Guest Post: “In 2009, 45 Percent of Banks with Assets Under $1 Billion Increased Their Business Lending”

Washington’s Blog.

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.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. attempter

    It’s the most clearly established truth of our time, you cannot regulate these rackets. The existing government is irredeemably corrupt, and even if it weren’t, even if you started out with tough laws and rules and personnel determined to enforce them, the rackets will always win the war of attrition.

    As long as the rackets exist, they will always capture and corrupt everything which is corruptible.

    The rackets have to be completely eradicated. There is no other solution.

    Yet, incomprehensibly, as we just saw with health racket “reform”, America still has a huge mass of persons who are evidently incapable of learning this. Evidently, the liberal teabaggers are the exact mirror image of the hard core 20% who still approve of Bush. It’s the exact same flat-earthers, just Democrat rather than Republican.

    So I guess we’ll see that same wretched crew swoon for anything Obama, Geithner, Frank and Dodd call “reform”, which is likely to be a reactionary package just like the health racketeering bill.

    The only answer – Break Up the TBTFs, and ban all speculative derivatives, among other things. Otherwise it’s a scam.

  2. i on the ball patriot

    ‘In 2009 45% of victims were raped by small gangs with assets under $1 billion.’

    So what, the victims were still raped, and the big rapists were still raping on a grander scale.

    Get rid of ALL the rapists.

    Deception is the strongest political force on the planet.

  3. Francois T

    It’ll take a spectacularly ugly, painful and widespread leg down to this crisis to finally neuter the financial industry lobbyists and their too many obsequious servants in DC.

    Only when enough people realize they could lose it all will something get done.

    Unless of course, the Clue Fairy starts spreading her pixie dust all over the planet.

    That’ll be the day!

  4. Cathryn Mataga

    Not much to say here, really, other than
    just how horribly sad it is. All we can do
    is maybe hope that Simon Johnson is wrong,
    and it is possible to have both an
    actual recovery and financial oligarchy.

    At least, maybe they could be made to build
    their luxurious estates in some of the
    economic backwaters, so as to provide more
    employment for maid and butler positions.

  5. ndk

    “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…”

    How do big banks stifle competition amongst small banks for small commercial lending if the big banks aren’t doing small commercial lending?

    I’ll grant you that there’s limited room for small banks in the securities markets, and they may not have sufficient deposits(though I wonder about that, particularly with the advent of CDARS). But the megabanks aren’t remotely interested in this space. I’m perfectly happy calling the megabanks worse than useless, but I don’t see them preventing smaller banks from making loans so much as totally trashed balance sheets and local economies are.

    1. Gentlemutt

      NDK is correct about trashed balance sheets and trashed local economies, but the mess created and led by the big banks has indeed resulted in fewer loans made by small banks.

      Here is why:

      1) There is now a regulatory/political battle being waged over who will supervise the financial landscape.

      2) Employees of regulatory agencies fear for their jobs and status in their pecking order, just like most everyone.

      3) Regulators like the OCC (but by no means only OCC) are actively raising capital requirements for small banks and criticizing bank management more frequently for *existing* loans. Small-bank managers therefore are finding they must raise new capital *and* scramble to satisfy tougher loan-portfolio standards before allowing their loan books to grow. This is not readily visible unless one works inside a small bank, tries to borrow from a small bank, or reads the 10-Qs and 10-Ks of publicly held small banks. Measures like loan-to-value, debt-service-coverage-ratio, and now global-cashflow are being substantially tightened.

      Washington operators can talk about ‘stimulating’ the economy all they want, but the foot soldiers in the regulatory bodies are counteracting such stimulus, at least via the small-bank lending channel. In so doing, the OCC staff may well be entirely correct in terms of defending the social good — certainly they are genuinely doing their level best to prevent more failures due to excess leverage and stupidly low underwriting standards. However, the unintended consequence of honest efforts to rectify the mess made by the arrogant big-bank clowns on Wall street and their eager lackies on K street (think ISDA) is definitely inhibiting loan growth in small banks.

      1. Gentlemutt

        Oh, and at least for now, CDARS deposits cannot be used to back much growth in a small-bank loan book, for the simple reason that the regulators currently are instructed from on high to view CDARS deposits as a kind of hot-money, even if the person making the CDARS deposit is a long-time customer of the bank (or even perhaps a committed shareholder or director of a small bank!).

        This is a classic baby & bathwater issue, which will eventually be sorted out with the promulgation of more precise standards, but for now it is what it is…

      2. ndk

        It’s a little circuitous, but that combined with the CDARS explanation sheds a little light. The larger banks do have a vested interest and ability to cause this sort of regulatory mayhem, I’ll concede, as it would go some ways toward preventing the small guys from ever becoming any sort of real challenger to them in the security market gravy train. I still think there are much better reasons to vivisect the megabanks than this one, but I’ll take every little bit of thrust in that direction I can get.

        Thanks for taking the time.

  6. David

    As a VP in Franchising, I have a bit of experience with funding for a small business loan. Right now money is tight. The current $2,000,000 cap on SBL may be increased by a bill in Congress. That will help some franchisers in the future but not now. There is a better way.

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