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Diane Ramirez

Small banks on the rise

by Diane Ramirez | Dun & Bradstreet Editor

January 31, 2012 | 2 Comments »

It’s been about three months since the launch of the Move Your Money, Dump Your Bank, and Bank Transfer initiatives. These protest movements encouraged consumers to ditch their big banks and set up shop with not-for-profit credit unions or smaller local banks.

While reports have varied on how successful the movement has been, it appears that thousands did move their money into the hands of smaller banks. (Bank of America, a biggie that committed the faux pas of introducing a highly unpopular debit card fee, noted in its recent investors call that it saw a jump in closed consumer accounts in the fourth quarter.) But how are the smaller banks faring?

According to the FDIC, the rate of bank closures — big or small, but we’re primarily talking smaller banks — has slowed. In 2009 and 2010, the agency seized 140 and 157 financial institutions, respectively. There were only 97 closures in 2011, including 11 in the month of January. So far, there have been seven closures in 2012 (including Tennessee’s BankEast, which was acquired by U.S. Bancorp; and Tennessee Commerce Bank, the first billion-dollar closure of the year). Although the pace is slowing, it’s a far cry from the pre-recession days of 2005 and 2006, when the FDIC didn’t shut any banks down.

As they are wont to do, investors are finding the silver lining in the closures. Bond Street Holdings was formed in 2009 to invest in failed banks in Florida. In addition, a team of investors acquired the collapsed BankUnited FSB, which it rebooted under the same name; BankUnited even boasts the first IPO of a rescued bank. These investment groups hope that a little recapitalization and rebranding will provide big payoffs in the long run.

On an even more positive note, Tangent Capital Partners analyst Christopher Whalen is putting his chips on smaller banks. He has announced plans to set up an investment fund that will focus on small and midsized banks. Whalen asserts that the biggies will need to break up, crippled as they are by exposure to troubled mortgage investments.

Maybe the country is getting back to its community-based banking roots.

The megabanks got fat on trading and investing and charging fees to its banking customers. Most of them (except for perhaps Wells Fargo) don’t have the ambition to do what traditional banks do, which is accept deposits and make loans to creditworthy borrowers; the margins are too thin. This, however, is the raison d’etre of most community banks and credit unions and there are many of them (the rash of recent failures aside) that can do it on a smaller scale to the benefit of both corporation and consumer.

Excellent article. Diane. I dumped Wells Fargo after some really predatory actions on their part. No amount of plush ponies in their lobbies can change their business practices. I am back with my credit union where I belong. I do see big banks breaking up but I also see, in a decade or so, smaller banks starting the cycle again of growth and acquisition (and fees).

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