Small Banks Are Getting Smaller

Check out the Wall Street Journal article “Ax Falls at Smaller Banks.” And, the subtitle to the piece: “Cuts at Lenders as Industry Job Growth Slows: ‘There will Be More to Come.”

This article is right in line with my Monday post “While Small Banks Disappear, Big Banks Get Bigger.”

“Smaller U. S banks and savings institutions are cutting jobs in a sign of a deepening financial industry retrenchment that is shaking firms from Main Street to Wall Street.”

“Banks that cut jobs in the third quarter outnumbered those that added jobs by 605, according to data from the FDIC.”

“Overall, banking industry employment rose slightly in the third quarter due to continued growth at the nation’s biggest banks.”

“Small banks are under especially intense cost pressure because they are as a group less efficient than larger rivals.” And, they cannot achieve the economies of scale that larger banks can experience.

“In the third quarter, about 76 cents of every $1 in revenue at banks with $100 billion or less in assets was consumed by expenses…. At the biggest banks, the figure was 58 cents. The efficiency gap has widened by 50 percent in the past decade.”

Many of the smaller banks just cannot compete in today’s environment.

And, the recognition of the industry problems continues to grow as Standard & Poor’s “downgraded some of the world’s largest financial institutions.”

The line I like best in this article is “This is confirmation that rating agencies are lagging indicators.” These downgrades should have taken place a long time ago. But, I have written about this many times over the past three years and even suggested how market instruments might be used to provide an “early warning indicator” for the purposes of bank regulation.

The banking industry still has a ways to go to regain its health. Until then, the economic growth of the economy will continue to be mediocre…at best.

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