Rich bank, poor bank

Writing in the weekend Wall Street Journal, Michael Rapoport had some interesting things to say concerning the Troubled Asset Relief Program, or TARP, that have kept many banks large and small from collapsing over the past year. Most of the media attention has been focused on the largest banks – most recently, Citigroup and Wells Fargo – and their frantic efforts to repay the TARP funds borrowed from the government. While it’s nice to think that these efforts reflect better banking industry health and a deeply felt concern with paying taxpayers back, they really are more indicative of how the banks want to return to the outlandish, pre-crisis bonus culture, something that was a no-go as long as they had TARP funds on their books.

In his column this weekend, Mr. Rapoport chooses to explore an area that has gotten less attention: the effect of TARP on smaller banks. He writes:

“Many banks below the top-tier national and superregional banks look unlikely to repay TARP soon. Beyond the eight original TARP recipients, only 17 of the other 69 banks who got at least $100 million from TARP have repaid the funds. The top eight’s combined assets of $9.4 trillion outweigh the larger group’s still sizable $2.5 trillion.

“Some banks would hurt themselves or their shareholders if they repaid now. They are posting losses, have high levels of bad or overvalued loans for which they aren’t adequately prepared, or have major exposure to the commercial real-estate crunch.”

In a recent speech to representatives of the big banks, Barack Obama was reported to have said, “Go forth and lend.” And lend they must if the economy is to prosper. But as Mr. Rapoport’s article shows, the banks most paralyzed by the crisis are the smaller banks. Likewise, the enterprises most endangered by the crisis are those banks’ customers, small and medium businesses. Conversely, big banks and big business are doing fine, better than fine, actually. Even if profits are depressed, they are slowly winning market share, consolidating in the face of so many smaller concerns collapsing. If a big business needs capital, there are myriad approaches it can take, from issuing shares to high-yield bonds.

President Obama seems to understand this and has even suggested to the big banks that they “increase…lending to small businesses – even if they don’t need the money or the numbers don’t stack up.” The recognition that small-business credit is an ongoing problem is a positive thing, but this seems a strange thing for a president to say, to encourage banks to pursue non-profit-making activities, but such is the state of American business. Besides, even before the crisis, big banks had relatively little to do with small business; they have little expertise in lending to small businesses, and the margins associated with such lending are too small for the big boys to worry about. But, with small and regional banks sidelined due to persistent woes, options are pretty limited at this point to jumpstart lending to small business.