Small Banks Disappear

Global governments are working to rein in “too big to fail.” But all they might be doing is hurting small institutions that could barely compete before.

The bailout of major banks during the Great Recession caused nations to reevaluate how the banks were functioning. Some suggested the biggest banks be broken up. That recommendation is still at the forefront of discussions.

But for the most part, the Dodd-Frank Act was meant to prevent future situations in which banks would require bailouts. It put regulations on banks to control lending and mortgages, attempting to avoid further abuse of these systems.

And the Act didn't discriminate. It was applied to all banks – big and small.

The Basel Committee on Banking Supervision also developed Basel III, a set of banking rules that will determine equity backing for risk-weighted balance sheets.

But as Bloomberg reports:

Still, banks have pushed back, arguing that some of the rules aren't necessary and could damage their ability to perform essential functions. They say large financial firms with multiple businesses in many countries -- so-called universal banks -- can be safer than more narrowly focused companies.

And the reality is their, particularly for many small towns. In rural areas like in Wisconsin, where small or family banks are more common, the way they function in the community is changing.

The Green Bay Press Gazette reports that something called a “balloon loan” is common in rural areas. For people who can't afford a normal loan, balloon loans help bring the rates down for a short period of time before it is refinanced. And this works when the bankers know the borrowers.

From the Gazette:

While the risky behavior of investment banks and insurance giants like Lehman Brothers and AIG led to the bank bailout and prompted the Dodd-Frank act, the smaller, community banks — many of which are found in Wisconsin — are also paying the price.

In the state of Georgia, 80 banks have failed since the start of the financial crisis, the Times-Georgian reports. And a study from the University of West Georgia's Center for Business and Economics showed that many of these regulations are to blame.

Some analysts believe there will be massive consolidation among small banks in the future. Joshua Siegel of StoneCastle Partners LLC told Bloomberg he predicts “from 2,000 to 4,000 banks being swallowed up” in the U.S.

But when it comes to the majors, Sheila Bar, head of the Systemic Risk Council, sees little change.

“I hate to say it,” she told Bloomberg, “but it looks like change is going to be incremental.”

Translation: the big banks will hold up fine.