TAKING IT TO THE BANKS

Small financial institutions paying high cost in crisis

Bailout money has favored large banks, smaller institutions say.

WASHINGTON (AP) — First they felt their reputations were stained by the financial meltdown. Now they’re paying a price they protest is unfair.

Small bankers are complaining loudly that they had nothing to do with the excesses of big Wall Street firms, freewheeling deals in the mortgage market and risky investments that precipitated the economic crisis.

Still, in the meltdown’s wake, community bankers find themselves under tighter scrutiny from federal regulators. They say the $700 billion financial bailout has favored large institutions. And they are upset about a special assessment the government wants to charge to shore up the Federal Deposit Insurance Fund, which failed banks are draining.

This all comes as the government, trying to stimulate the economy, is pleading with banks — big and small — to lend, lend, lend.

“People on the street should be interested because community banks account for 45 percent of all small-business loans,” said Camden Fine, president of the Independent Community Bankers of America. “They really are the engines of Main Street, and if you have an overly aggressive and overly harsh examining atmosphere, then that causes the community banks to pull in their horns.”

“Criticism of loan portfolios in community banks has become so harsh that community bankers say, ‘I’ll just stop making loans until this thunderstorm passes,’” Fine said. He said small banks can turn to other revenue-making practices for a time and wait out the harsh examination environment.

The big bankers say banking examiners have become more prickly with them, too.

“We’re hearing from Congress that we need to lend, and we’re hearing from examiners to shore up the balance sheets,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, which represents large financial firms. “We are subject to incredible amounts of scrutiny.”

Bank consultant Bert Ely said he sees a disconnect between Washington and the banks across America. “The bankers are saying that they’re getting criticized on a lot of loans and that the examiners have gotten tougher,” Ely said. “Bankers are telling me that they are lending, but that a lot of the better borrowers don’t want to borrow — that people are pulling back, projects are getting postponed, people don’t want to buy a new car.”

Some small banks did get involved in risky lending practices that led to their demise. Other small banks were too weak to survive the recession. Most of the 40-plus banks that have failed since January 2008 had less than $10 billion in assets. But Fine said they represent only a fraction of the country’s 8,000 community banks.

He notes that more than $10 billion of the $17.8 billion in losses to the FDIC fund last year came from just one large bank — IndyMac in Pasadena, Calif. On the other hand, while Seattle-based Washington Mutual Inc. caused a loud thud in September when it became the largest U.S. bank failure, JPMorgan Chase & Co took it over. The deal was brokered by the FDIC and didn’t cost the deposit insurance fund a dime.

What’s really raised the ire of the community bankers, however, is the one-time, emergency assessment that all banks are being asked to pay to shore up the FDIC fund, which is struggling to back deposits in a rising number of failed institutions.

The FDIC board expects bank failures will cost the fund about $65 billion through 2013. The law requires the insurance fund to be maintained at a certain minimum level of 1.15 percent of total insured deposits. Bank failures have sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level since 1987. That compares with $52.4 billion at the end of 2007.

“Why are community banks paying for the sins of Wall Street banks?” Dean Anderson, vice president of Lake Elmo Bank in Lake Elmo, Minn., wrote in one of thousands of protest letters the FDIC received over the assessment. “Some community banks will not survive this outrageous assessment. I know it will cost our institution almost $400,000 for this unbudgeted item. ... The little guy is always the one who gets hammered and no one seems to care!”

Connie Rohde, vice president at Brenham National Bank in Brenham, Texas, wrote: “For years we community bankers have fiercely competed with the big guys for every deposit we could get to remain in business. These irresponsible banks were making the big profits, while we struggled to stay alive — honestly. And now you are demanding us to bail them out! Can you not feel our frustration?”