Smaller banks rebound more slowly

By Wendell Cochran


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The latest data from the Federal Deposit Insurance Corp. shows that the nation’s banks continue to recover from the financial crisis, reporting stronger earnings and increasing loan volume.

But an analysis by the Investigative Reporting Workshop shows that for the vast majority of banks — those with less than $1 billion in assets — profits are harder to come by as they continue to try to work their way through a disproportionate amount of troubled loans and foreclosed property.

The 90 percent of banks with less than $1 billion in assets accounted for less than 10 percent of total assets at the end of June. These banks make about 11 percent of all loans, but they held 15.5 percent of all nonperforming loans and foreclosed property.

In the first six months of the year, these small banks made just 7.5 percent of the industry’s net profits.

Of the 566 banks that reported they lost money in the first half of the year, 546 have less than $1 billion in assets.

Of the 166 banks with a troubled asset ratio of greater than 100, 160 held less than a billion in assets. Among the 20 banks that have failed so far this year, the largest was the $437 million Mountain National Bank of Sevierville, Tenn., which closed on June 7.

Compare that to the 108 largest banks, each with more than $100 billion in assets or 80 percent of the total. While they make 77 percent of loans, they hold 72.5 percent of troubled assets. And they earned 82.3 percent of bank profits in the first half the year.

Just one of them, JPMorgan Chase — the nation’s largest bank — made $10.2 billion from Jan. 1 through June 30. By contrast the 6,288 banks with less than a billion in assets earned $6.2 billion as a group.

Unsurprisingly, this disparity produces some hard feelings. In a recent blog post, Camden Fine, president of the Independent Community Bankers of America, wrote, “With each new headline of megabank greed and recklessness, ICBA is more and more convinced that downsizing and restructuring these behemoths is the only way to protect our financial system from existential risks, our community banks from suffocating regulation and our nation’s taxpayers from perpetual servitude to our Wall Street masters of the universe.”

Fine’s group has come out strongly in support of legislation sponsored by Sen. Sherrod Brown, D-Ohio, and Sen. David Vitter, R-La., that would force the largest institutions to either raise more capital or shrink.

Meanwhile, bankers and their advocates continue to rail against what they see as unfair tax advantages given to credit unions, even though on the whole they are much smaller than banks. Just 209 of the 6,819 credit unions have $1 billion in assets.

Total credit union assets were just over $1 trillion at the end of June — barely half the assets of JPMorgan Chase. The largest credit union is Navy Federal, based in Arlington, Va., with $54.4 billion in assets. That would make it the 38th largest bank. Only three credit unions would be among the 100 largest banks.The median size of credit unions was $22.2 million in assets, compared with $168.9 million for commercial banks.

Because they are nonprofit institutions, credit unions are exempt from federal income tax. That’s long been a sore spot for the banks, which now see a potential opportunity in tax reform legislation to challenge the exemption.

On its website, the American Bankers Association says, “As Congress examines the affordability of tax exemptions in the face of rising debt levels, it should target the credit union tax exemption, an anachronism whose need has long disappeared. Credit unions’ tax exemption was originally linked to their mission to serve people of modest means. But there is evidence that the tax subsidy is going to individuals who clearly do not need subsidized financial services and benefits the largest credit unions.” So, the ABA concludes: “If credit unions want to act like banks, they should be taxed like banks.
 Plain and simple.”

Naturally, the credit union folks don’t see it that way.

The Credit Union National Association says on its website: “The credit union tax status benefits all consumers — credit union members and those who are not credit union members. While the credit union tax expenditure “costs” the federal government approximately $500 million annually, consumers benefit to the tune of $7 billion-$8 billion annually because credit unions are tax-exempt. “

The group goes on to say, “Credit union competition helps keep bank and savings and loan prices lower. For example, credit unions offering credit cards now charge lower interest rates than most other lenders (on average by two or three percentage points). Imagine how expensive other lenders would make credit cards, or auto loans, if credit union competition did not exist! But that is exactly what would happen if credit unions are taxed.”

At this point, it isn’t clear whether the congressional tax writing committees will include a call for credit union taxation in bills they are preparing to consider this fall.