Regional Bank Failures Bad for Home Owners, Small Businesses

Dec. 4.09 | About: SPDR S&P (KBE)

Recently, I have been writing a lot about regional banks and the capital problems they have been having. This is having a direct impact on lending capacity available to small and medium sized businesses (SMEs) and households. As a result, a lot of workers are losing jobs in these smaller enterprises. And the unemployment statistics may not fully reflect this. I see this as a major reason economic growth has been weak.

A high profile regional bank failure came just this week via AmTrust Financial Corp., the private holding company of AmTrust bank (the former Ohio Savings Bank), leading me to believe regional banks will continue to underperform larger banks, which have been helped by government largesse.

More evidence that the policy skew toward big banks is having a negative impact on small businesses and households comes via the Bloomberg story below. In Georgia I count 21 bank failures this year alone, 27 in total since the subprime crisis began in 2007. Now, much of the reason behind the failures is reckless lending and bankruptcy is the consequence of this risky behaviour.

Nevertheless, the vaporizing of local and regional banks is bound to have a disproportionate effect on SMEs and households. Listen to the accounts in the video below. it shows the cycle in action: reckless lending, overcapacity, bust, and failure. The businessmen interviewed say this has cut them off from viable sources of funding, creating more economic distress. Banker John Poelker says more failures are likely. And that means yet more economic distress.