Bailouts

Is TARP Hurting Small Banks?

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Seems smaller banks that took TARP money aren't feeling so flush:

The Treasury Department's bailout program was designed with Wall Street megabanks in mind, according to a new watchdog report. The "one-size-fits-all" program may actually be hurting small banks that are struggling to repay the money or even deliver quarterly dividend payments, the report says.

Did the poor little bank break?

The main bank bailout program anticipated banks springing back from the crisis and raising fresh funds to repay the government, the report says.

That's exactly what happened to most of the big banks that took the most bailout money. Yet small banks continue to struggle, dragged down by souring loans for commercial real estate and high unemployment. Hundreds more small banks are expected to fail by the end of next year.

The 690 small banks that took bailout money are even worse off, according to a report Wednesday from the Congressional Oversight Panel, which monitors the $700 billion financial bailout. Already, one in seven has failed to pay a quarterly dividend due to Treasury. They can't afford the payments, which will nearly double in 2013.

…"There is very little evidence to suggest that the (bailouts) led small banks to increase lending," the report says.

In the end, that could mean that the biggest banks get even bigger, the report says. Dozens or hundreds of bailed-out banks could collapse or consolidate because they can't afford their obligations to taxpayers, it says. That would leave the handful of biggest banks with an even larger share of the banking system.

I'm a lot less worried about the potential for bank consolidation than, say, Elizabeth Warren (who can be seen fretting about the report elsewhere in the article). There's no correct size for banks, or correct distribution of large and small banks. But the Washington influence game, which bestows huge benefits on the dominant players in a market, means that government programs to "help" an industry frequently end up as government programs to benefit an industry's largest, most entrenched players. And that's why you end up in endless cycles of artificially distorted markets and politician-designed fixes that, in the end, only distort those markets more.

Lots more from Reason on TARP here.

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  1. Small banks die in waves all the time. It never leads to total consolidation because when conditions improve people with capital start NEW small banks.

    I think the bigger problem is that this time around the regulatory environment will be extremely punitive for new banks, and the cost of compliance with the new regulatory scheme will be so high that operating a small bank won’t make any sense as an investment. If you raise the cost of compliance high enough, you dramatically increase the minimum customer base that it’s economically sound to have, because you have to defray your compliance costs across your customer base to be competitive.

    1. Right and right. On top of that, all of this re-regulation and bailout crap prevented the small and medium-sized banks from grabbing market share from banks that should have been allowed to fail/downsize.

  2. Goddam, Fluffy, leave something for the rest of us, would you?

    1. Yep- I got nuthin’, now…

      Well said, Fluffy!

  3. The “one-size-fits-all” program may actually be hurting small banks that are struggling to repay the money or even deliver quarterly dividend payments, the report says.

    Duh.

  4. The Krugmanites won’t be satisfied until the banking industry is returned* to being a boring regulated utility.

    *I know, I know.

  5. There’s no correct size for banks, or correct distribution of large and small banks.

    The power law says otherwise.

    The craft beer movement is correcting the disruption in the power law caused by the beer wars of the 80s.

  6. I’m a lot less worried about the potential for bank consolidation than, say, Elizabeth Warren (who can be seen fretting about the report elsewhere in the article). There’s no correct size for banks, or correct distribution of large and small banks. But the Washington influence game, which bestows huge benefits on the dominant players in a market, means that government programs to “help” an industry frequently end up as government programs to benefit an industry’s largest, most entrenched players

    Why do you think Ms. Warren is concerned about consolidation? Because large banks exert undue influence on the market and the regulators to the detriment of their competitors.

    You and Ms Warren share the same concerns. Well Suderman is at least paying lip service, I dunno how concerned he really is about it since he doesn’t bother to offer any solutions especially since he implies that the markets are in fact distorted when he says :

    And that’s why you end up in endless cycles of artificially distorted markets and politician-designed fixes that, in the end, only distort those markets more.

    So there is a correct size. Small enough that they can’t hold enough influence either stand alone, or in small groups of mega banks.

    It’s almost as if Mr Suderman is being purposely obtuse. Please tell me Mr. Suderman, how does one prevent huge benefits from being conferred on the huge banks?

    And don’t say get rid of regulation cuz that’s about as likely as me getting a pony. What’s a realistic alternative to limiting the size of the instutions in order to alleviate the problems of too much influence by certain large players?

    1. A supreme court that throws out virtually everything congress passes.

    2. get rid of regulation

      The right answer is the right answer, even if its unlikely to happen.

    3. “Why do you think Ms. Warren is concerned about consolidation? Because large banks exert undue influence on the market and the regulators to the detriment of their competitors.”

      The problem is that, regardless of the desires of institutional players, there is a strong corporatist bent in the American political system right now (in the Italian sense, not the progressive boogeyman sense).

      Large institutions might have more influence on government decision making, but they’re also easier to convert into organs that serve a political agenda. Corporatists don’t favor Big Business, Big Union, Big Banks, Big Religion, etc. because they’re getting bribes (though it doesn’t hurt), they favor them because they are Big.

  7. Libertarians should care very deeply about the dangers of corporate consolidation, especially when this consolidation is a result of government policy. Competition is good for consumer freedom, and decreased risk also decreases the perceived need for government bailouts.

    Decentralization is closer to the nature of a true free market (which would have no such a fake legal entity as a corporation, only proprietorships and contractual partnerships that purchase liability insurance). Corporate conglomeration is merely an increase in socialized risk.

    1. Sure, but you dont prevent consolidation caused by regulation by adding on more regulation.

      That is treating the symptom instead of the disease.

      1. The government has done the opposite of preventing consolidation by bailing out banks. Regulations that create further barriers to entry are anti-competitive, which encourages further consolidation.

        The government has been batshit insane on this issue since the last months of the Bush administration. And it’s worse now.

        1. Exactly. The current regulations have caused consolidation and created a barrier to entry for small guys. The solution isnt more regulation to split up the big guys, but to remove the barriers for the small guys and allow the big guys to fail.

        2. Libertarians are the only people who support small businesses.

          Dems hate all businesses, but support the big ones when they have to/need some bribe money.
          Reps love big business and screw the small guys any chance they get.

          The only smart thing the LP has done in recent memory is when they tried to push The Party of Small Business idea.

          1. But I really think this is where libertarianism can make huge inroads into the Left. Most everyday leftists heartily endorse and patronize small businesses, and loathe big businesses for pushing out the little guy.

            They simply don’t seem to recognize that regulation, licensing, strict accounting rules and corporate income taxes are all largely the reason for conglomeration and benefit solely the biggest businesses as the small businesses can’t compete and the big businesses already have all the regulatory-compliance infrastructure to easily coopt the smaller businesses. SOX was a huge small business killer – my old 4-employee contractor company had to spend disproportionate time doing extra paperwork for SOX accounting, which cut into our productivity for our clients. Government is the primary reason for oligopolization, which would not be natural in a free market where businesses and their employees bore full responsibility for their actions and debts.

            In a laissez faire economy, where as I explained, there are no corporations, a business owner would be taking huge liability risks every time they expand beyond their oversight capacity, engage in bad business practices and fraud, or violate the rights of individuals. Liability insurance companies would operate as market regulators, as they would determine rates based upon conditions and risk of liability – discouraging actions like the irresponsibility that led to the BP oil spill.

            The Left are open to a small business message, but we have to take it to them strongly and prove that true laissez faire is the best way to limit both conglomeration and risk to the consumer, when combined with strong tort and criminal enforcement against violations of individual rights and fraud.

  8. Why can’t the small banks just borrow a billion from the Fed with the promise to invest it in Treasuries, like the big boys? Bennie would be happy cause it’s defacto QE2.0 and they get a risk free 2-3%. As the big boys show, make the numbers big enough and everything is rosy.
    I know it’s very un-libertarian, but just saying, why can’t small banks exploit the system like the big ones?

    1. I could be wrong, but I think that most of them don’t borrow directly from the Fed discount window. I think that only Fed shareholders can borrow from the Fed. Smaller banks borrow from the big banks.

  9. all of this re-regulation and bailout crap prevented the small and medium-sized banks from grabbing market share from banks that should have been allowed to fail/downsize.

    It also seems as if the FDIC is pursuing an explicit policy of bank consolidation by steering the assets of failed banks to the three or four largest bank holding companies.

    1. But I thought big corporations were bad.

  10. It also seems as if the FDIC is pursuing an explicit policy of bank consolidation by steering the assets of failed banks to the three or four largest bank holding companies.

    Not only that, but the FDIC is taking all the risk on the bad assets. A(nother) stealth bailout of the big banks.

  11. Most everyday leftists heartily endorse and patronize small businesses, and loathe big businesses for pushing out the little guy.

    Unfortunately, this “love” of small business is based on an emotion remarkably similar to the feeling one might have for a pet, or a cute baby seen on the street. They don’t actually comprehend wealth creation, or what it takes to run a business profitably.

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