Smart Borrower Blog

Small Banks Are Closing Their Doors

Nov 8th, 2010 @ 4:40 PM by Debbie Dragon

Small banks across the country are being forced to shut their doors. This year alone over 140 small banks so far have closed up for good. While small banks at one time were the mainstream of America, today they are vanishing and someday may be a thing of the past.

Just like many other small businesses, small banks have been unable to compete with the larger ones. Add to the competition a depressed economy and many small banks simply cannot survive. The recession has left small banks scrambling. While large banks throughout the country were able to get financial tax payer help through government bailout programs, small banks were left to fend for themselves.

One area that particularly hit small banks hard was risky real estate loans, which includes loans for the development of apartment buildings, large industrial sites, shopping centers and more. These loans have high default rates and about 13% of lending in all banks consists of these loans. In small banks analysts say that number jumps to 28%.

As the recession has continued, small banks have had to write off more and more faulty loans. While all banks are required to have a certain amount of money set aside to cover faulty loans, when that money is needed, like it has been over the last couple of years, small banks can reach the danger level.

Another strike against small banks is their lending capabilities. Large banks have the luxury of lending on a much larger scale, while small banks are confined to their local communities. Small banks have been hardest hit in communities with the weakest economies.

A final factor that seems to be contributing to small banks closing is the foreclosure rates for the area. While small banks have closed all over the country this year, the highest bank closure rates tend to be in states with high foreclosure rates. Illinois, California, Georgia and Washington State have each had over 10 small banks close this year and all four states are in the top 20 states where foreclosures are the highest.

Analysts predict that small banks will continue to shut their doors and this year alone as many as 200 small banks could close up for good. The same trend is also being predicted for next year.

Another banking trend that is expected to continue is the high rate of job losses. Over the last three years, the banking industry has lost almost 200,000 jobs and as more small banks close their doors, that number will continue to go up.

About Debbie Dragon
Debbie Dragon is a full time freelance writer and the co-owner of

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