Small Banks Disappear. So Do Loans to Small Businesses.

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The number of banks is down to just under 6,900. There were 7,000 a year ago.

Banking regulation adds to costs. This wipes out small banks. It subsidizes big banks.

Which banks caused the crisis of 2008? Large banks. Which banks got the lion’s share of the bailouts from Congress and the Federal Reserve? The top 6 banks.

The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.

The six — JPMorgan, Bank of America, Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley — accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment-services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.

The crisis made them bigger, more powerful. The bailouts were subsidies for failure.

Which banks hold 70% of all bank assets? The top 12 banks.

Who loses? Small businesses. They get loans from small banks.

Which businesses provide the vast majority of new jobs? Start-up businesses.

Sheila Bair used to run the FDIC. She now works for a nonprofit think tank. Here is her assessment: “All too often, the large banks use their models and their algorithms, and if you don’t fit in their boxes, you don’t get the loan.”

Is there a pattern here? You bet there is.

FDIC officials say the agency’s process has always been rigorous and that it has received few applications in recent years as the economy has struggled. The lack of new banks forming is similar to “a pattern we’ve seen following previous financial crises and the recoveries that followed,” FDIC Chairman Martin Gruenberg said during a news conference last week. “We would expect to be seeing additional applications as the environment improves, and we expect to be approving them.”

David Baris, a partner at law firm BuckleySandler LLP who said he has advised more than 30 new bank startups over his career, said he has been steering clients away from starting a bank. “As a result of the FDIC’s policy, a [new] bank becomes a much-less-attractive investment, and it will be difficult to find sufficient capital.”

There has been only one new bank start-up in the last three years, the improbably named Bank of Bird-in-Hand. That is because it is located in Bird-in-Hand, Pennsylvania.

Interest rates have fallen. This has hurt community banks. These banks rely on loans to generate revenues. The big banks make their money in highly leveraged speculation.

What happens when these highly leveraged investments go bad? The banks get bailouts from the federal government and the Federal Reserve.

Small banks don’t get bailed out. They get merged.

Continue Reading on online.wsj.com

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