It’s Time to Break Up the Bigger Government-Supported Banks

According to The Wall Street Journal, “Smaller U.S. banks and savings institutions are cutting jobs in a sign of a deepening financial-industry retrenchment that is shaking firms from Main Street to Wall Street.” More than 2,500 banks cut their work forces in the third quarter of 2011, reducing their staff by a combined 20,332 jobs, or 2.5%.

Small community banks are, of course, the lifeblood of small businesses. This is therefore a worrying development, with the potential to sink the U.S. economy into a second recession, if not properly addressed. It’s high time we broke up some of the bigger government-supported banks and better regulated their product offerings, which have become too diversified and create systemic risk. More smaller banks obviates the “too big to fail” conundrum. This then breathes life into the smaller regional banks, which are closer to their communities and borrowers and are better able to evaluate financing realistically.

Large government-supported regional branches of behemoth banks run by 18-year-old, high-school graduate “store managers” (or in the words of The Wall Street Journal, “straight-out-of-college branch-manager trainees”) are not going to make intelligent credit decisions and loans to smaller businesses in need. They are going to err on the side of conservative formulaic lending, which is choking off credit. As a model of success, look at asset-based lenders—a diversified, fragmented group of small commercial lenders in excellent financial condition that continues to lend to smaller businesses despite the ongoing constriction in small business lending by the bigger banks.

Comments

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I would also agree with this article that it is indeed now time to break up the bigger government supported banks. That is a must.

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