Tuesday, September 29, 2009

Too small to bail has a nice ring to it - Breakingviews

I agree with the sentiment and the main thrust of the article but, there always is a but, it seems to make a small mistake. First the synopsis: the banking industry is seeing larger losses at the larger banks, the systematically important banks caused the financial crisis because of the interconnectedness, smaller banks have thus far outperformed their larger brethren, however larger banks lend out more of their deposits thus getting vital credit out to the financial system, one last caveat is that the larger banks employed more mark to market and thus we may see more & larger (relatively) losses on smaller banks financial statements later in the cycle.

From the article But there is a wrinkle. Small banks lent out a smaller percentage of their customers’ deposits — 83.11 percent in the second quarter, to be exact — than the big banks, which converted 94.24 percent of deposits into loans, according to SNL Financial.

That’s a meaningful difference. If all banks in the United States kept their loan-to-deposit ratios in line with smaller banks, some $830 billion less credit on total deposits of $7.54 trillion would reach American businesses and consumers than if all banks adopted the big banks’ lending ratio.

My bone is with the larger banks lending out more of their deposits. You see on the face this statement is correct, prima facie for you latin lovers. However, deposits are only one form of liability for a bank. (quick note: bank loans are assets for banks and bank deposits are liabilities for banks. Banks will also issue debt as a longer or shorter liability.) So that is where the bone is. Larger banks will have better access to the capital markets; thus, these banks can lend out more money because the liability side of their balance sheet will be larger than a bank who cannot issue debt as cheaply or as in abundance as its larger cousin. Here is the information directly from the horse's mouth, otherwise known as the FDIC.

In this case there is no story. Banks larger than 10B in assets lend out only 58.19% of their liabilities. Smaller banks lend out 70.13%. If you divide it by smaller banks being less than 1B than these banks lend out 75.26% of their assets and the banks larger than that lend out 60.32% of their assets. What is the story here?

Well the story is B.S. or as I say in front of my niece baloney, not to be confused with bologna a delicious treat for children.

The truth is that if all the banks lent out at the rate small banks are currently doing there would be more credit in the system. Don't know if that is necessarily a good thing, but the idea is on much more solid ground than the sloppy analysis from the article.

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