Turmoil at several midsized U.S. banks has focused attention on the economic significance of smaller institutions. Find out more.
The four U.S. banks that have balance sheets larger than US$1 trillion have so far suffered relatively little damage from the funding squeeze prompted by rising interest rates; on average, their shares have fallen by 10 per cent since the beginning of March.and Signature Bank, which failed a little more than a week ago. The KBW regional banking index, which tracks 50 sizeable banks outside the top tier, has lost 21 per cent of its value over the same period.
Whether for reasons of geography or because they are in unusual lines of work, the customers of small banks often have few other places to turn, according to Aaron Klein, a Brookings Institution scholar and former U.S. Treasury official during the 2008 financial crisis. “Money market mutual funds don’t invest in small businesses and start-ups,” said Klein. “It used to be an advantage for banks that they had federal deposit insurance, but the Federal Reserve has bailed out money market funds twice in the last 15 years.”
Shut off from some larger institutions, many small businesses that survived the pandemic found that the support of a local banker was the deciding factor. Community banks processed 60 per cent of the funding awarded during the first phase of the Paycheck Protection Program, a federal scheme that provided funding for businesses that kept paying workers during the forced shutdowns.
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