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OPINION: The deck is stacked against smaller banks

Nomi Prins' newest book is "It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street."

Albert Einstein once said, "Any fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction."

Swap "powerful" for "violent" and you've described today's banking landscape. For it's the bigger banks, which received disproportionate federal aid, that are thriving, compared with smaller, community-based ones.

Over the past couple of weeks, most of the big banks posted solid quarterly earnings - and high bonus expectations. This confirmed that if you get a lot of federal capital, you tend to show better profits (or at least, survive). And it showed that it's a lot better to be big nowadays.

In Little Bank land, things aren't so rosy. The Federal Deposit Insurance Corp., which has closed 99 banks so far this year (compared with 26 in 2008 and three in 2007), has another 416 smaller banks on its "problem list" - numbers last seen about 15 years ago.

Additionally, the FDIC's deposit insurance fund is running out of money. The accelerating pace of this year's bank failures has drained the fund of about $25 billion. Last week, FDIC head Sheila Bair warned Congress that the insurance fund would not regain a positive balance until 2012, and that's only if banks prepay their next few years of insurance premiums - something smaller banks would have a tougher time doing in their weakened state.

So why are little banks dying and big banks thriving?

With more capital and access to greater federal perks, big banks are making money again by taking on more risk in their trading divisions - the areas that speculate rather than deal with ordinary consumers.

As far as services for mere mortals are concerned, all banks continue to see rising losses from mortgage, credit card, auto and other consumer loans. But these troubled loans are a bigger problem for smaller banks.

For one thing, smaller banks tend to hold a greater concentration of commercial real estate loans, whose defaults are rising. Second, they have more trouble accessing the markets to raise capital than bigger banks. And finally, the Treasury's Public Private Partnership Investment Program targets its assistance toward the more complex troubled mortgage assets that the big banks hold, not the kind of loans that smaller and community banks make.

One way to bring back more equality to the banking system is to break up the bigger banks - an idea pushed by Paul Volcker, former Federal Reserve chairman and the head of President Barack Obama's Economic recovery Advisory Board. This would effectively reinstate the Glass-Steagall Act of 1933, which did just that but was repealed in 1999.

The investment banking arms could become separate companies. Then, any government aid that had been deployed by those branches could be redirected to combat the rising tide of consumer losses, as well as commercial mortgage products that are showing signs of growing weakness.

Yesterday, recognizing the problems that smallness has caused, Obama proposed using some of the TARP money for community banks, which are also more likely to lend this money to ailing small businesses. Additionally, he'll increase the caps on Small Business Administration-backed loans.

But, unfortunately, the administration remains resolute against making bigger banks smaller, preferring to focus on minor regulatory changes rather than wider landscape revisions.

For now, at least, the biggest banks should be required to pay a greater portion of their trading profits to the FDIC's insurance fund. These banks, after all, benefited the most from the public's generosity. Now that they're back on their feet, it's only right that they help subsidize the insurance fund that backs consumers' deposits, wherever they reside.

It's time for the big banks to spread some of their public-backed advantage around - not pay it out in record bonuses.


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