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“The SVB bailout shows the government's commitment to community banking”


Photo Above - Beaver and Wally prepare to open their first bank account.
Not Shown - Their bank fails because it bought tons of US Treasury Bills.

"Saving community banking". That hilarious bon mot was served up this morning on CNN. But don't be hating on them. Fox would probably say the same thing. I absolutely KNOW that PBS, ABC, CBS and NBC would too.

Many people revere small town community banks. Who are run by folks like “Bob Fitzpatrick” (not a real person), who started 30 years ago as a lowly teller. Bob knows everyone by name. Well, at least everyone who is either a big customer, or overdrawn. Bob helps organize the annual St Patrick's parade down main street. Which is what he's probably doing today, instead of addressing yield and maturity risk.

The problem is, the US government's commitment to “community banking” and Bob's job security are complete BS, and almost everyone knows it.

US regulators DON'T WANT 10,000 local community banks running amuck. Their ideal model is “European Banking Regulation”. A handful of ginormous institutions, with a permanent cadre of onsite government regulators, controlling every action in the most minute detail, 24/7.

Wait – that sounds EXACTLY like what we have already in America, right? Chase. Citibank. Bank of America. Wells Fargo. After that, it starts to get shady. A bunch of Wall Street players you probably don't even identify as banks - Goldman Sachs; Morgan Stanley; Charles Schwab. Did you know that Apple is also a giant bank? General Motors too. I think you see the problem.

In fact, since 1990, more than 10,000 US banks and S&L's disappeared. Well, not like into a sinkhole, or closed by the government. Most of these were “acquired” by the Ginormous banks. Regulators don't like having 10,000 feral banks running amuck. Tiny players which don't know what they're doing, or follow regulators' directions.

While these 10,000 banks disappeared, the survivors QUINTUPLED in size. The average size is now $2 Billon. Chase is nearly $3 trillion (with a T). Try insuring THAT with the FDIC, boys and girls . . .

But “everyone hates big banks”, so the government serves up pathetic TV blather about how they are working to save small banks.

The problem is, SVB wasn't “small”. It was $200 billion – 10X the size of the average bank. A top 20 bank in terms of size. And even then, the government whiffed at regulating it, or even detecting fatal risk. There will now be an auction of the salvageable pieces of SVB. To even bigger banks. Chase – would you start the bidding please? You're too big to fail!

I'm agnostic on this size thing (but not the lying thing). I happen to enjoy having 5,000 ATMs, around the nation. 24 hour toll free service. Two factor online access authentication. Robust defenses against hackers and ransomware. Credit cards, mortgages, CDs, car loans, overdraft protection, home equity lines of credit, . . . all of it.

You CAN get at least half this stuff at “Bob Fitzpatrick's community bank", of course. It probably has at least a half dozen ATMs. A safe deposit box, if you still use one of those. Debit cards. Probably not credit cards. “Car loans? Let me check with the guy in the back. I think we stopped doing those.” Two factor authentication? What's that?

One quarter of Americans are “unbanked”. No bank relationship at all. These guys are the lifeblood of predatory check cashing firms. People can be unbanked for a bunch of reasons, but the most common usually are “bouncing a zillion checks at my last bank” and “no income/gig income which is spotty”. The unbanked folks hate big banks. Unbanked people fully understand that big banks don't tolerate bounced checks the way Bob did 30 years ago when he was just starting out as a teller.

Small banks ARE in a fight for their survival. And I hope they win. At least some of them. I want more than 5 ginormous choices for banking. The European model sucks. And European bank service is shitty. And the prices are high.

But giant banks are VERY easy for governments to regulate. Which appears to be the key to survival, no? The government always seems to pick winners and losers, even when it's not obvious to us . . .