The Smaller Banks Continue To Lose Ground

by: John M. Mason

First, we need to define what the Federal Reserve calls “Small” banks. The Federal Reserve defines small banks as domestically chartered banks that are not counted among the largest 25 domestically chartered banks in the United States. Hence, “Large” domestically chartered banks are the largest 25 domestically chartered banks in the United States.

As of September 7, 2011, the largest 25 domestically chartered commercial banks in the United States account for 56 percent of all the banking assets in the United States. The smaller banks represent about 28 percent. Foreign related financial institutions control about 16 percent.

From August 2010 to August 2011, the total assets held by the small banks in the United States grew by one-half the rate at which the total assets in the largest 25 banks. The “large” banks grew at a 1.4 percent annual rate while the “small” banks grew by 0.7 percent.

Over the last calendar quarter from the banking week ending June 1 through the banking week ending September 7, the smaller banks actually shrank by almost $20 billion while the larger banks grew by about $165 billion.

Over this last quarter, “Loans and Leases” at the smaller institutions dropped by almost $70 billion. At the largest 25 banks, “Loans and Leases” rose by over $130 billion. At the smaller banks, loans fell in ALL categories.

From the banking week ending August 3 through the banking week ending September 7, “Loans and Leases” at the smaller banks rose by only $1.5 billion while they rose by more than $30 billion at the 25 largest banks.

One could say that lending activity is increasing on Wall Street but not on Mail Street. One could ask questions, however, about the type of loans that the larger banks are initiating. See my posts from last week.

But, business loans are not suffering the most at the smaller banks. Over the past year, residential real estate loans (home mortgages) at these smaller banks have declined by more than 6 percent, year-over-year. Over the past quarter these loans have fallen by $12 billion.

And the smaller banks still are suffering through the commercial real estate decline as these loans declined by almost 7 percent, year-over-year through August. Commercial real estate loans at these banks declined by more than $40 billion over the last quarter alone.

The FDIC reports that there were 6,413 commercial banks in the banking system as of June 30, 2011. Of this number, 865 banks were included on the FDIC’s list of problem banks for this date, more than 13 percent of the banks in insured at that time. Troubled banks total even more than this, some estimate that more than twice this number are very fragile institutions.

From these data one can argue that bank lending activity may be picking up, but it is not picking up among many of the smaller banking institutions that still face serious balance sheet troubles. These organizations are not going to participate in any economic recovery and, in fact, are going to have to be closed or absorbed into the banking system that will remain. As mentioned above, even though loans may be picking up in the largest 25 banks in the country, the loans may not be going into the physical investment that would cause the economy to grow faster than it is.


Dollar deposits continue to flow out of the United States into foreign banking offices through domestically located foreign related institutions. From August 2010 through August 2011, cash assets at these domestically located foreign related institutions rose by about $470 billion! This increase in cash assets tracks closely the Federal Reserve’s implementation of QE2 and represents about 75 percent of the roughly $630 billion rise in cash assets of the whole United States banking system.

The interesting thing for our purposes is that the item on the other side of the balance sheet that most closely tracks this increase in the cash assets of foreign related banking institutions is “Net Due to Foreign Offices.” That is, this money is going off shore.

From August 2010 through August 2011, this account, “Net Due to Foreign Offices”, rose by almost $540 billion. In the last quarter it rose by over $160 billion. In the last month it rose by $112 billion.

Can the rise in this this account be associated with the sovereign debt crisis in Europe and the recent problems faced by many of the large European banks?

I believe one can make a pretty strong case for this conclusion. The Fed’s QE2 preceded the agreements that the central banks made last week to provide more U.S. dollars to European banks.

Of course, this provision of U.S. dollars to the world is not spurring on economic growth although it may be helpful to preventing another Lehman Brothers meltdown.