Too Big to Bail: The Rise of Local Banks


Big bank stocks are taking a beating on Wall Street these days, and the future looks, in a word, “iffy” for behemoth financial institutions, thanks to bank reforms proposed by the White House. But vacuums don’t last for long. Regional banks are well positioned to fill the void left by big bank uncertainty.

It’s really a matter of size and capabilities. Most big banks, like Bank of America (Stock Quote: BAC), Citigroup (Stock Quote: C) or JPMorgan Chase (Stock Quote: JPM) have huge investment banking and trading desk operations, with the capacity to gravitate toward higher risk financial strategies. When the news came out a few weeks back announcing a new and improved banking reform plan, the stocks of all those banks fell precipitously the same day.

Smaller, more regional banks don’t have super-sized trading and investment banking operations — the areas that President Obama promised to focus on when he outlined his administration’s bank reform plan last month.

That opens the door for competitive regional banks like Fifth-Third Bancorp (Stock Quote: FITB), Sun Trust Banks (Stock Quote: STI) and KeyCorp (Stock Quote: KEY) to perform even better. All have strong balance sheets, sufficient capital, aren’t tainted by the TARP loans that led the federal government to take a closer look at bigger banks (and thus led to calls for reform), and all are showing improved estimated earnings pictures going forward, judging from Wall Street analyst reports issued recently.

Thus, on Jan. 21, the same day that President Obama rolled out the new bank reform plan, and the same day that big banks saw significant declines in their stock market prices, regional banks went the opposite way.

There is little doubt that on the very day that the President announced bank reform, the “smart money’ went toward regional banks and away from bigger banks. By and large, it’s a bet on Wall Street that banking restrictions would hurt big financial institutions, and help mid-sized banks that aren’t really a target of Uncle Sam.

In other words, in the past few weeks we’ve gone from "too big to fail" to "too big to bail."

Don’t think for a moment that Wall Street hasn’t noticed.

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