Federal Reserve Bank of St. Louis building | Photo courtesy of Wikimedia Commons

As Big Banks Took A Dive, Little Banks Thrived



Federal Reserve Bank of St. Louis building | Photo courtesy of Wikimedia Commons

Even as the global financial system convulsed and large banks failed or came to the brink, many smaller community banks prospered throughout the country, according to a report released this week by the Federal Reserve Bank of St. Louis.

The St. Louis Fed studied the performance of community banks from 2006 to 2011, a five-year period that includes the most harrowing financial crisis since the Great Depression. With everything that went wrong during the period from 2006 to 2011, the study’s authors decided to look specifically at the nation’s successful banks, to see what they did right.

“The thesis of our article is that the community banks that will succeed in the future  likely have characteristics similar to those of the community banks that performed well during the recent financial crisis and its aftermath,” wrote R. Alton Gilbert, Andrew Meyer and James Fuchs, the study’s authors.

During that period, Missouri saw 41 of its community banks — banks defined as having assets less than $10 billion — thrive, while 11 failed. Missouri ranked very close to neighboring Kansas in its proportion of thriving banks.

When you take into account Missouri’s weak GDP during the period of study, the performance of its community banks becomes more impressive. Missouri experienced slightly negative GDP growth from 2006 to 2011, but 13.53 percent of its community banks thrived during that time.

The next closest state with negative GDP growth and strong bank growth was Ohio, with -5.7 percent GDP growth and 7.43 percent of its banks thriving — a proportion almost half of Missouri’s.

The states with highest proportions of community banks are all to the south — Louisiana, Texas and Oklahoma. As the report notes, those states have thriving agricultural and energy sectors that have helped bolster the finances of local banks.

But thriving banks everywhere had some things in common: They were smaller (generally had assets of less than $100 million), they were more rural, they had lower loan-to-asset ratios, they gave fewer loans to the commercial real estate and construction sectors, and they had higher concentrations of family property mortgages.

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