Trouble in the commercial real estate market is highlighting a disparity between large and small banks with ominous implications for the Obama administration´s approach to "too-big-to-fail." Though officials have insisted that banks would not want to be classified as "Tier 1" institutions due to the higher capital requirements and additional leverage restrictions they´d face, the CRE problem proves there are still advantages to being very big.
Small banks are having a harder time than their giant counterparts in dealing with CRE loan losses because they can´t absorb the chargeoffs as easily, according to a
"Aggressive write-downs usually mean aggressive hits to capital, and in many cases community banks are disproportionately affected by write-offs that a large bank could take in stride," wrote blogger Kevin Funnell. "Moreover, as we've seen thus far from the federal bank regulators, especially the FDIC, massive CRE write-offs are a prelude to a death spiral for banks that are `too small to save.´"
Paradoxically, community banks, Funnell wrote, are drawn to CRE lending "as one of the few avenues" in retail banking "left open to them where they can not only make decent money but provide better (i.e., more personal) service to the borrower than many of the big banks."
If the country´s largest banks have gotten big enough to drown out small banks in the retail banking sphere, and if the smallest banks really have been driven into a riskier, narrower area of lending by this phenomenon, then it´s worth wondering whether there´s an anti-competitive element built into the largest of the large. If there aren´t legal grounds now for challenging this status quo, then there may be after the Obama plan bestows more "Tier 1" privileges upon a select few.
Some are beginning to wonder if the administration should use the regulatory restructuring effort to construct more solid controls on "too-big-to-fail," so as to keep the majority of the country´s banks from becoming definitively too small to compete.
