What About Banks That Didn’t Take TARP Money?


failed bank; via Flickr

Question: Thank you for your illuminating illustration of the fiasco involving our banks on PBS. How many banks in this country did not take TARP money and why is so little attention given to them? Shouldn’t they be some sort of role model for future banking or were they just lacking opportunity to be as sinful as the now needy? They certainly have not been made known to the public. Thanks for your response.

Paul Solman: America had 7000+ banks, last I looked: Almost all but the biggest of them didn’t take government money. Does that make smaller banks role models?

Not necessarily. Here’s a list of banks that failed in this past month alone:

failed bank chart; via FDIC

Clearly, banks that didn’t make what turned out to be ridiculously risky loans are better role models than those that did. But I find something suspiciously circular about this reasoning. And for all I know, the Temecula Valley Bank, say (see above), wasn’t being especially imprudent – AT THE TIME – in making the real estate loans that appear to have taken it down.

Your question suggests that the problem with banking in recent years is “too big to fail.” That is, banks were allowed to grow so large, their failure threatened the financial system. But in the Great Depression, thousands of banks failed. The systemic risk seems to have been an overexuberance across the board, especially with respect to real estate prices. Plus a whole bunch of fraud, made possible in part by a regulatory environment that looked the other way, or encouraged lending to those who couldn’t otherwise afford it.

Most sober analysts these days think “too big to fail” is a problem. But I don’t think it’s the only one in this episode.