Not all banks are the same. Keep that in mind when digesting news of our nation’s ongoing financial sector problems.
It is hard to think of another sector of the U.S. economy that is more heterogeneous than banking. And there is no other country that has as diverse a banking system as we do. So sweeping references to ‘the banks’ may be misleading.
To start with, we have a lot of banks. When the current crisis began to unfold, there were more than 7,000 separately chartered commercial banks. This didn’t include nearly 1,500 savings and loans and mutual savings banks or more than 8,800 credit unions. (That sounds like a lot, but there were more than 14,000 banks 27 years ago, when I first taught economics in this country. )
One reason we have so many banks is that state governments always have had the right to charter depository institutions within their own borders. There are slightly fewer than 1,800 banks with national charters and more than 5,000 with state ones.
Out of some 7,000 banks, about 2,800 have assets of less than $100 million. This 40 percent of all banks has only 1.2 percent of all assets in the banking system. Virtually all these banks are state-chartered and usually are located outside major urban areas.
The next 3,800 banks have assets between $100 million and $1 billion. Some have national charters, but most are state banks. This 55 percent of all banks has about 9 percent of all banking assets.
There are just fewer than 500 banks with more than $1 billion in assets each. This 7 percent of banks has nearly 90 percent of all banking assets. The largest 86 banks, each with more than $10 billion, have 72 percent of all assets.
This is a highly skewed system with a large number of small institutions holding a small market share and a handful of enormous banks holding most of the market.
One can find banks of all sizes in trouble. But the vast majority of all banks in the smaller categories are in good shape. The problems that really threaten the nation are concentrated in the largest 22 banks that each have more than $100 billion in assets.
Yes, a few small banks, some of which are located in outer-ring suburbs of growing urban areas, loaned too high a proportion of their funds to a few property developers or builders. They are broke or in serious trouble now.
And yes, as the economy sours, banks of all sizes may have to write off more bad loans. Default rates are rising on all categories of consumer debt, including car loans and credit cards. So are defaults on commercial debt. But most of the banks with less than $1 billion in assets have been prudently managed and are in no danger of going broke.
There is a striking concentration of potential “toxic assets” — complex and poorly understood and priced financial instruments — in the very largest banks. For example, the “notional amount,” or face value guaranteed, of credit default swaps is equal to 160 percent of total assets for the largest 86 banks. But for the 3,800 mid-size banks, such assets make up just 0.02 percent of those banks’ total; for the 2,800 small banks the percentage of such assets is zero.
Any recession imposes financial stress on banks of all sizes. But a large majority of banks are not in serious danger, nor do they threaten the economy. A few extremely large banks are in deep trouble, and that endangers the economy as a whole. We should never get into this jam again.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.