Today I exchanged e-mails with an old friend who works for a small bank with branches in the single digits. His bank never got into sub-prime loans and stuck to its conservative practices. Because of this, his bank is doing very well right now and has little worries of collapse.
One of the unseen side effects of the bailout, as exemplified in his e-mail, is that banks that didn’t take risks nor made mistakes should be seeing explosive growth, but they are not. The government insurance and bailout plans are keeping bad banks afloat and preventing good banks from making the just fortunes they deserve.
Here is his e-mail with permission: (I have [replaced] some words for anonymity)
Due to the government’s interference, people at banks that are going to fail or have failed like Wachovia have been reassured and are not leaving. Even the depositors at [regional] bank that I warned was going to fail decided to keep their deposits there. When the govt. says, "don't worry" people tend to listen. That is one of the most irritating things about banking right now. We are doing great and would be getting all kinds of deposits from larger institutions if there wasn't any government involvement. As for loan requests, it seems that most commercial loan customers are in a sit and wait position. We are still getting requests, just from the same old sources. Not many new people who are qualified and just can't find credit. Might be something to do with [our market] and the plethora of community banks in it.