The FDIC took down three this afternoon. Here is the link to their website which prominently features the victims so you can zero in on the disaster you want to review.

All of the failed institutions were pretty small fish which gives me the opportunity to launch into an idea that’s been rattling around in my tiny brain for awhile.

One of the failed banks was Valley Capital Bank which is located in Phoenix. It had about $40 million in assets and around $41 million in deposits. As many of you know, I live in Phoenix and I was only vaguely aware of this bank’s existence. Why it turned turtle isn’t addressed in the FDIC literature but it’s a fair guess that it was over extended in commercial real estate, probably an apartment complex here and a strip mall there as well as some loans on land and a few spec homes. Nothing big and in the larger picture nothing that probably ever needed to be built or financed.

Here’s what keeps gnawing at me. If we consider too big to fail a problem, should we also be concerned with too small to matter? By that I mean, what’s the use of banks like this? They’re too small to enjoy any economies of scale, they’re too small to offer any inducement for any but the smallest of  businesses (the most risky)  to bank with them and they can only act as a conduit for the banking services that most retail customers want. So, in a normal business environment they’re forced to venture out on the risk curve to generate acceptable earning assets.

These banks sprang up all over the place during the boom years and the game was to grow quickly, reach a critical mass and sell off the franchise to a regional bank looking for access to the market or even to one of the big financial institutions that could fill a hole in their network. Make no mistake, it wasn’t the intention of any founding group to build some Jimmy Stewart hometown bank that would see to the needs of the community for the foreseeable future.

So as we contemplate financial reform, maybe we should also consider just not allowing the establishment of any new community banks for say the next five years or so. Arguably, we don’t need them. With 8,000 plus banks in this country it could hardly be argued that we’re under-banked in any meaningful sense. We may find that at the end of the road the real cost to the country’s fisc has been from failed small banks, not repaid programs that bailed out the big banks and, perhaps, a better use for the risk capital that has been diverted to the formation of new banks could be better used if it were encouraged to look elsewhere for investment opportunities.

That’s all somewhat disjointed and I suspect I’ll revisit the subject as I think more about it. Anyway, it’s off my chest now and comments are most welcome.