BLOG VIEW: A Word On The Smaller Banks


Two weeks ago, the Federal Reserve System quietly issued a press release announcing the launch of Partnership for Progress, which it dubbed as an ‘innovative outreach and technical assistance program for minority-owned and de novo institutions.’ Quite frankly, this program could not have come at a better time, considering the challenges facing these sectors.

Minority-owned banks have long occupied a significant niche in the American economic landscape by providing products and services to communities that were too frequently excluded from access to credit. Today, they continue to serve at-risk communities, and in many cases (particularly in regard to minority-owned community development financial institutions), they represent the only legitimate financial services source for many people (particularly in rural regions of the Deep South and in the geographically isolated stretches of the American Indian reservations).

De novo banks also face unusual challenges in today's environment. Outside of the Great Depression, can you imagine a worse time to actually consider starting a new financial services company? Many de novo banks have focused entirely on commercial lending, which may be fine for their bottom line, but that strategy provides no benefit to individuals who are finding fewer outlets for residential loans.

The vast majority of both minority-owned banks and de novo banks are on the smaller side. As everyone knows, community banks (and local credit unions, for that matter) generally avoided getting battered in the recent subprime meltdown. Their prudent lending practices, coupled with their peerless knowledge of their communities, helped them remain solid when their bigger rivals took a tumble for reaching out too far into uncharted territories.

At a time when many mighty financial institutions have stumbled, it is imperative for the Fed to pay attention to the smaller entities. It is important for the industry to be aware and, where applicable, lend a hand to these institutions.

If the market is going to correct itself, it will need more community-level institutions that can provide stability in their presence and intelligence in their business dealings.

The Fed's announcement on Partnership for Progress didn't specifically state if the program will cover issues relating to secondary marketing, but I would like to assume that will fall into its ‘capital and liquidity’ focus. If anything, these smaller institutions need to be vibrant and active players here. The sooner they can be positioned to move loans out of their portfolios and into the secondary market, the better it will be for their operations and for the industry's inevitable return to normalcy.

– Phil Hall, editor, Secondary Marketing Executive.

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