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Did Your Bank Take Federal Money?

By Marc Tracy

Although it ran over two weeks ago, this Wall Street Journal article on the community banks--those small (under $1 billion in assets), locally-focused financial institutions that we've covered extensively--is still very, very much worth your time. It does a phenomenal job of portraying the delicate situation that these small banks, the vast majority of whom were prudent enough to avoid the unwise investments and overleveraging that has done in so many larger, more prominent institutions, now find themselves in: "They walk a fine line," the article says. "Holding to lending standards that are too strict can worsen the local economic toll. Being too lenient can run afoul of newly nervous bank directors and regulators, or endanger the bank's own survival."

We thought of it while reading this post from The New Entrepreneur advising small business owners to check this list, courtesy of non-profit journalism venture ProPublica, to see whether their bank (large or small) has taken any of the $700 billion given out under the infamous Troubled Assets Relief Program. "I was surprised by how many small regional and community banks were on the list," blogger John Tozzi writes.

The complicated thing, as we've written before, is that the money really represented something like a double-edged sword for most of these community banks. Many of them didn't truly need it (unlike several of the nations largest banks, which needed the extra infusion of capital like a person in the desert needs a drink of water); and in fact, many had good reason not to take it: among other things, taking it places you on lists like ProPublica, which are then linked to by blogs like The New Entrepreneur and BizBox, and all of a sudden you're a bank that needed the money--even if you didn't--and you look bad and tenuous and maybe you start to lose scared customers, etc. (Fear kills.)

On the other hand, if one community bank wasn't going to take it, another would, and given the extremely bank-friendly terms on which this capital is invested, and given the dryness of the current credit market, we're looking at a potential significant competitive disadvantage to those banks that refused the money.

In other words, being on this list may mean your bank made unwise decisions, and that you ought to look elsewhere; or that it made unwise decisions, but has learned from them and now has the extra capital it needs to tide it over to better times; or that it did not make unwise decisions but took the money for other reasons. Similarly, banks that do not appear on the list may not for any number of reasons that should point you in any number of directions.

So check out the list, and do look for your bank--you should always be as abreast as possible of your bank's condition, and never more than during these tumultuous times. That said, there is no one heuristic method for determining the health of your bank (or lack thereof). Ultimately, your gut--the same gut that likely helps you make other important business decisions every day--is going to have to be your guarantor of last resort.

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