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Obama Must Help Small Banks

U.S. leaders must save this country's banks. And I don't mean Citigroup (C).

For all the billions of dollars pumped into our largest financial institutions through TARP and other programs, small banks have been left out in the recessionary cold. Most of the roughly 130 banks that have failed this year had less than $10 billion in assets; hundreds more are endangered.

One lesson here is that free market laws apply to small financial firms, but not to large ones. The official story is that the latter are systemically important to a functioning economy, which is why the government rescued them. There's some truth to that (some falsehoods, too).

Here's the thing -- small banks are also systemically important. Unless such institutions thrive, small businesses can't grow. Community banks hold roughly 11 percent of total industry assets, but make 38 percent of all small business and farm loans. Banks with less than $1 billion in assets make more than half their loans to small businesses, according to the FDIC.

Without financing, these enterprises can't create jobs. Equally important is the kind of jobs they create. These companies are where most of us start our working lives. Without such investment, to state the glaringly obvious, many communities already struggling with the effects of the housing and commercial real estate busts face deeper problems. The system -- namely, the economy -- doesn't work.

And for all the worshipful attention paid to big companies in this country, as measured by employment small companies matter more. Much more. That's a problem, since small businesses are losing more jobs during the economic downturn than are big businesses (see chart below -- click to expand).

One reason for that is that, with many community banks too weak to lend, large banks aren't picking up the slack in helping small businesses. President Obama acknowledged as much in meeting with Wall Street chieftains on Monday. Next week he's slated to meet with community bankers. What holiday tidings will he have for them?

Perhaps Obama might back legislation such as the Bank on Our Communities Act, with would allocate TARP funds to small banks. Or perhaps endorse a proposed new federal borrowing program that community banks could tap to make loans to small businesses. Giving small businesses more leeway to restructure their debt with lenders also would help.

There's no shortage of ideas. Do we have the foresight? Do we have the will?

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