More on Mid-Sized Banks and Their Giant Problems

Why are mid-sized banks falling like frat boys after a toga party, with failures mounting more quickly than those of their larger banking brethren?

Even before the spectacular Wall Street crash, WaMu's takeover, and the run on IndyMac, industry analysts were forecasting that small and mid-sized financial institutions would be dropping like flies. An article in the New York Times in February cited analyst predictions that as many as 50 banks could fail in the following 12 to 18 months.

The main problem: A hyper-competitive lending market in recent years put smaller banks at a disadvantage relative to their larger rivals, particularly in mortgages and credit cards, where bigger banks were able to offer a wider range of deals to consumers. Forced to beef up their lending in other areas, many small-to-middling banks began to make a real push into commercial and construction lending -- eventually becoming over-exposed. The Comptroller of the Currency pointed out in January that community banks had doubled their ratio of commercial real estate loans to capital in the past six years (PDF link), with 30 percent of the nation's banks holding construction and development loans that exceeded 100 percent of their capital.

Of course, there are also simply way more smaller banks than larger ones. Of the roughly 7,500 U.S. banks, less than 40 top the $20 billion-plus threshold that typically marks the difference between a mid-sized player and a large one. While it's arguable that the bigger banks took bigger risks, their smaller rivals got in over their heads as well.