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March 10th, 2009

Too Small to Fail



Park Avenue Bank of New York City is the latest institution to withdraw its TARP application, opting to raise private capital instead. Chief Executive Charles Antonucci pledged $6.5 million of his own resources last year, and plans to invest $15 million this year along with the board and other investors who plan on pledging private capital as well.

Park Avenue Bank has only five branches. With only a handful of locations, it’s easier for smaller banks to raise their own capital and operate outside of government influence. Realizing the regulatory baggage that accompanies government funding, a trend is growing amongst smaller banks that are standing stronger on their own:

In January, government officials, bank executives and the Government Accountability Office said at least 50 banks that qualified for aid have rejected the Treasury’s funds. Those that withdrew include many of the small, healthy banks that were supposed to be at the heart of the government’s plan to restart lending.

As smaller banks continue to prove their viability, larger, global banks (the targets of the majority of government funding) have shown little but weakness. Just last week, Bank of America Chief Executive Ken Lewis said bailout money made them weaker. Shares of Citigroup dropped below the $1 mark for the first time in the bank’s history on March 5:

[from today's Wall Street Journal] Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.

It’s quite clear that the sentiment among smaller banks has changed from “where’s our money?” to “we don’t need your money.” Last October former Treasury Secretary Henry Paulson encouraged banks mergers in order to create fewer, but stronger institutions. Now, Washington needs the smaller institutions to restart consumer lending because the “too big to fail” institutions cannot do it on their own.

Whether Washington knows it or not, this could help re-establish the middle-class bank tier that we wrote about at the end of last month.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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