At the same time, the big banks have sat on the money the government threw at them – with the encouragement of the Fed – instead of loaning it out to Main Street to kickstart the economy. As wenoted in 2012, small banks are much more interested in making loans to the little guy than the TBTFs:
Banks that received federal assistance during the financial crisisreduced lending more aggressively and gave bigger pay raises to employees than institutions that didn’t get aid, a USA TODAY/American University review found.
Dennis Santiago – CEO and Managing Director of Institutional Risk Analytics … notes:
The vast majority of this contraction of credit availability to American industry has been by the larger banks ….
Fortune reports that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition ….
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks….
[Federal Reserve Bank of Kansas President] Thomas M. Hoenig pointed out in a speech at a U.S. Chamber of Commerce summit in Washington:
During the recent financial crisis, losses quickly depleted the capital of these large, over-leveraged companies. As expected, these firms were rescued using government funds from the Troubled Asset Relief Program (TARP). The result was an immediate reduction in lending to Main Street, as the financial institutions tried to rebuild their capital. Although these institutions have raised substantial amounts of new capital, much of it has been used to repay the TARP funds instead of supporting new lending.
On the other hand, Hoenig pointed out:
In 2009, 45 percent of banks with assets under $1 billion increased their business lending.
45% is about 45% more than the amount of increased lending by the too big to fails.
Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.
Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks’ own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.