Why community banks need Obama, and he needs them

President Obama met with 12 community bankers Tuesday in a bid to spur lending to small businesses. They were looking for action from him, as well.

By , Staff writer

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    President Barack Obama (2nd r.) meets with CEOs of several small and community banks at the White House on Tuesday.
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A White House meeting Tuesday between President Obama and small-bank leaders was a matter of mutual interest: They need his help, and he needs theirs.

Community banks provide the bulk of small-business loans on which the economy relies. They have the potential to help fuel an economic recovery – something at the top of the president's wish list. But many of these banks are in weak shape, looking for help from regulators and from Mr. Obama.

The meeting came roughly a week after the president met with top executives for the largest US banks. Whether the White House planned it or not, the two meetings offer a pointed contrast.

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The big banks were the ones whose potential failure threatened the whole financial system in 2008. They got the most generous government bailouts and now are repaying that federal money and moving on – in many cases bigger and more powerful than ever.

Small banks, meanwhile, have been failing with tick-tock regularity over the past year, garnering much less in bailout money. Yet their health is also vital to the economy.

"It's fair to say that most of these community banks were not engaged in some of the hugely risky activities that helped to precipitate the financial crisis," Obama said after meeting with 12 bankers Tuesday.

Obama's goal: boost lending to small businesses

He said the community bankers shared with him their views on the financial regulatory reforms now under review in Congress – and they don't see eye to eye with the largest banks.

Obama pledged to work with the community banks to try to "cut some of the red tape," with the goal of boosting small-businesses loans and job creation. Obama acknowledged that this goal involves some careful balancing. Independent regulators want to prevent banks from digging themselves deeper into a hole as their losses on bad loans rise. At the same time, if banks tighten too far, lack of credit could choke off economic recovery.

"In some ways, the pendulum may have swung too far in the direction of not lending after a decade in which it had gone way too far in the direction of getting money out the door no matter the risk," Obama said.

500 banks in danger zone

Still, banks of all sizes are seeing loan losses rise. Most of the nation's 8,000 banks are not at risk of failure, analysts say, but more than 500 are on the Federal Deposit Insurance Corp. (FDIC) watch list. The industry's troubles are in some ways hitting the small banks hardest. Small or mid-size banks tend to have greater exposure to troubled commercial real estate projects. They aren't as diversified as the giant banks – no profits from investment trading to cushion their loan losses. And, unlike for the 19 largest banking firms, the government hasn't labeled these firms as so important that they won't be allowed to fail.

In all, 149 banks have failed since the beginning of 2008, according to a recent report by the Congressional Oversight Panel.

Commercial banks on average are now charging off bad loans equal to 2.7 percent of their assets, on an annualized basis, according to the FDIC. That charge-off rate has doubled in the past year, and it's at the highest level recorded in data going back to 1984.

If Obama wants small banks to lend a lot next year, he may need to focus on their ability to obtain fresh capital – and not just on the tone that regulators take in supervision. The risk is that the rising loan losses will eat through banks' existing reserves, so they are short on capital to serve as the foundation of new loans.

Banks have "experienced an unprecedented 'evaporation' of capital in the past two years," economists Paul Kasriel and Asha Bangalore write in a new economic analysis for the Northern Trust Co. in Chicago. "It is widely expected that another wave of capital evaporation is on the way," they add, due to defaults of commercial and residential mortgages.

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