In praise of small banks
October 30, 2008 12:43 PM Subscribe
posted by up in the old hotel (80 comments total)
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The nine biggest US banks aren't using $125 billion in federal bailout money to make loans. They're going to use taxpayer dollars to buy other banks.
That's not what we were led to believe
when Henry Paulson forced the nine banks to take the money. Turns out the banks could do as they wished
with the money.
What about small banks? We seem to have forgotten about the thousands of local, community banks. They have functioned well in the crisis, and reports suggest that they have even benefitted
A veteran banker who works for one of the big US banks says
it's time we did something to help them. Smaller banks, he says, are part of the community and have a better understanding of who their customers are.
"If we make the bailout funds available to the community bankers, I promise they will know what to do with the money. They will lend it and they will make prudent lending decisions, based on direct and comprehensive knowledge of the borrower. So what are we waiting for?"
The big banks -- BofA, Citibank, JPMorgan -- aren't lending because they don't know their customers. They have depersonalized lending by relying on inaccurate credit scoring
to make loans. Sometimes lenders don't even do that
. This got the banks into trouble. They wound up with toxic assets of dubious value
on their balance sheets.
It seems that this depersonalization goes to the heart of the global financial crisis. In finance, it's sometimes referred to as the "principal-agent problem
." It means looking at numbers instead of people.