Bigger Is Not Always Better

Glenn Reynolds points out this article in Washington Monthly, contrasting the failure rates of the mega-banks with those of smaller regional/local banks.

Too Small to Fail

Easily overlooked amid the crisis of big banks today, small-scale financial institutions are, for the most part, holding steady—and sometimes even better than steady. According to FDIC data, the failure rate among big banks (those with assets of $1 billion or more) is seven times greater than among small banks. Moreover, banks with less than $1 billion in assets—what are typically called community banks—are outperforming larger banks on most key measures, such as return on assets, charge-offs for bad loans, and net profit margin.

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.

I've mentioned this aspect of the mortgage meltdown before. I've been involved in some local low-income lending programs for home ownership (CHDO's) and they have done rather well, much better than the middle-income lending market has done with "fancier" products. Those that have done the best are those partnered with regional/local banks. And IMHO the reason they've done well is that those banks were immensely more likely to hold and service the loans they originated, and thus that much LESS likely to make loans just to package and sell them out. Thus, they exercised sound lending principles and judgement even when making sub-prime and higher-risk loans.