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Local banks can help towns not disappear if they are allowed to actually bank. They could in theory loan to the local plumber to start his shop, the auto body s
by throw9away6 3y ago
Local banks can help towns not disappear if they are allowed to actually bank. They could in theory loan to the local plumber to start his shop, the auto body shop for a paint hanger etc. The problem is that all those loans are risky and risky in a correlated way such that if a local anchor company goes up so does the rest of the lending portfolio. Over a long enough period of time a local adverse event will happen and the bank will get hit by a liquidity crisis and get shut down.
The too big to fail banks are also prone to this but in theory because they are regionally diversified less so. Still without government guarantees about half or more would have failed in 2008/2010 time period. Still with government guarantees these banks have access to much cheaper capital and more liquidity when a crisis happens to they can out compete smaller banks.
- taeric 3y agoI get that, on paper. Most of the risks shouldn't be correlated in a systemic way, though? If a local plumber goes up on their loan, why would that mean a local construction company is going down? If you over lend, sure, but otherwise? One going down should be somewhat shiftable to another. Unless you are lending to people that have absolutely no assets that can be liquidated? But, that just seems to say that we only lend on leveraged value nowadays? That is a depressing thought. And again, any systemic risk to a town seems to still exist. Just now there is nothing keeping money made on interest in the town. Literally all profits from localities are shifted out to wherever the bank is located.