When the federal government hands out billions of dollars, it's going to have a big impact — you can bank on.
Some local bankers think Washington's bailout of the banking industry, including the TARP or Troubled Asset Relief Program, is putting them at a competitive disadvantage to the big banks that have taken the money.
The irony to this is that most New England banks are in good shape, having avoided the toxic subprime loans and exotic investments that have crippled institutions elsewhere. Yet, while they haven't taken any federal bailout cash, they're being asked to bear a heavy price.
Small banks might prove particularly vulnerable to this.
For example, Jim Nye, president of the National Grand Bank in Marblehead, worries that the piles of cash heaped on the big banks, along with federal backing, may make them seem more desirable lending institutions. (The larger banks carry assets in the billions and hundreds of billions; small banks deal in the hundreds of millions.)
While Nye makes it clear that he wouldn't want the money in any case — his institution is on a firm footing — borrowers are in short supply in this economy and the power and protection of the federal government might give national banks a big edge in attracting them.
More significantly, other bankers are raising concerns regarding the unfair burden put on small banks to shore up the Federal Deposit Insurance Corporation. The FDIC guarantees that the money you put into associated banks can't simply disappear overnight. If the bank fails, the corporation will refund your savings up to $250,000.
But the money is provided by the banks themselves and so many institutions have failed recently that the fund is largely depleted. A painful one-time charge has been put on member banks to restore it.
"For small banks you're probably taking 40 to 50 percent of their pre-tax earnings," says Kim Meader, a vice president at the Salem Five. The charge will be levied in June and come due in September.
A bank with $1 billion in deposits, he explains, would be required to pay $2 million before September.
Meader sees unfairness. "They're putting money into the big banks. With the other hand they're taking it out. At the same time they're having all the small banks kick in the same percentage." It doesn't matter that those banks never took any bailout money.
"This is significant to us," says David LeFlamme, president and CEO of North Shore Bank in Danvers. The charge will take a large bite out of the profits of small banks and the burden, he indicates, is unfair because "We didn't create the problem."
Indeed, LeFlamme echoes Nye when it comes to the health of his bank. Less than 1 percent of mortgagees have defaulted on their loans. "That's only one (bad) loan," he notes with pride. And as the stock market tumbles, savings are increasing.
The only downside to this — again a sparsity of borrowers.
K. Brewer Doran, dean of Bertolon School of Business at Salem State, arrived in the area 21รขÑ2 years ago and she's been impressed by the local banks. "We have very healthy small- to medium-sized banks, and it's shielded us from the housing crisis. It's really important that the local community realize what a resource our local banks are."
Doran rejects the notion that federal monies make the larger banks more attractive for borrowers. It's a view shared with Meader and LeFlamme. All three believe that the TARP money actually "taints" the banks that take it.
"A lot of borrowers are afraid of big banks," she says. "They're afraid of taking out a big loan and then having the loan be called (repayment demanded). ... You don't know what you're dealing with with the big banks."
At the same time, she agrees that the FDIC charge will be a blow to small banks. "That's one legitimate gripe."
Beverly National Bank briefly flirted with the notion of taking TARP money but turned it down, citing the complications attached to it. Vice President Michael Gilles hasn't seen any backlash against his bank associated with the TARP money going to larger banks.
"But I certainly see how it could be perceived that way. It may turn out that way."
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