Small Banks Still Ailing

If you pay only a little attention to banking news, then you probably think that the industry has largely healed. After all, big banks like JP Morgan and Goldman Sachs have had fabulous rebounds. Wall Street bonuses are said to be way up this year. But a Reuters article today explains that the smaller regional banks still have a ways to go. The article also rightly points out that, until they fully recover, the broader economy won't either.

This chart compiled by Reuters tells the tale:

small big banks 2009-11.jpeg

As you can see, big bank shares (blue) have largely rebounded into positive territory. Regional banks (yellow) shares are still struggling. Although this chart only shows share performance, it's characteristic of the general states of these sectors as well.

So why are big banks doing better than the little guys? For a few reasons. First, investors are going to feel much safer putting their money in a large institution that the government will more likely deem systemically relevant. The government will almost certainly allow the 4th Savings Bank of Duluth Minnesota to fail before gargantuan Citigroup.

Second, many of those big banks are involved in a broader diversity of activities. Some of those activities, most notably trading, have done quite well recently. Banks that rely more on community lending have had trouble getting funding. Regional banks also have proportionally greater exposure to consumer and commercial loan losses due to their simpler business models.

The problem is that many of the big banks don't cater as much to small business as regional banks. And for the economy to gain sustainable momentum, small business must recover.