25 things vanishing in America, part 2: Community banks

Heritage Community Bank, Glenwood, Illinois.
Silver Falls Bank, Silverton, Oregon.
Sherman County Bank
, Loup City, Nebraska.
Columbia Community Bank, Hillsboro, Oregon.

The names of small community banks either closed by the FDIC, or struggling, reads on like a somber trip down the memories of a bucolic past. With our economic crisis, will we lose the small community banks that are so much a part of our heritage, their very names reflect it?

In all appearances, the rumors of community banks' downfall have been exaggerated. While some small banks are less well-capitalized and, thus, more susceptible to risky loans or a run on the bank, it appears that community banks weathered the storm on Wall Street simply by being far from it -- and by the very lack of sophistication the quants at big banks have been ridiculing for a decade or more. Yep. Perhaps not understanding complicated hedge fund principles was their savior.

While big international banks were putting their portfolios into mortgage-backed securities and complex derivatives, community banks were making loans and attracting depositors with CDs and comfortably small interest rates. In other words, being regular, ordinary, old-fashioned banks.

The biggest risk for small community banks could be the small business loan. If the economy does, indeed, implode, sending home values plummeting further and greatly decreasing Americans' spending power, small businesses could begin failing at record rates; and the security many of them have offered up to community banks -- their homes -- might be a cold comfort, indeed.

Today, small community banks appear to have escaped the worst fate of their international powerhouse brethren. But the last act is yet to be played; will the belief in the value of homes above all else end up as tonic or curse? We shall see.

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