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Smaller Banks Thrive Out of the Fray of Crisis
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"It's a sign that banks don't trust one another," said Richard Marston, a finance professor at the Wharton School of the University of Pennsylvania. "It's a canary in the coal mine; it shows just how distressed those relationships have become."
Large banks use Libor loans as a way to balance the books at the end of the business day. It allows the banks to make sure they're holding enough capital relative to the loans they have made. The inability to borrow -- or to borrow at a reasonable price -- forces banks to make sure they have enough money before they make a loan.
In some cases, that means a loan does not get made.
"Clearly, there are challenges," said Sam Schreiber, Wachovia's president for the mid-Atlantic. He said the cost of loans has increased and the bank has tightened its lending standards. "But when there's opportunities and a client needs credit, we're working to fulfill those needs."
Wells Fargo, one of the nation's largest mortgage lenders, yesterday quoted an interest rate of 9.125 percent on a jumbo mortgage loan, three percentage points higher than the 6.125 percent rate on a standard mortgage. Jumbo loans are riskier: They cannot be sold to the finance companies Fannie Mae and Freddie Mac because of their size. In the Washington area, the category includes loans larger than $729,750. Historically, lenders assessed a surcharge of 0.5 percentage points for the extra risk of holding a jumbo loan.
Smaller banks, by contrast, make few mortgage loans, and their lending is fueled by deposits, rather than borrowing. That has insulated them from the troubles on Wall Street.
"We're drowning in liquidity because people are pulling money out from other places and depositing it with us," said Peter Fitzgerald, chairman of Chain Bridge Bancorp in McLean. "Our bank has benefited tremendously."
Fitzgerald, a former senator from Illinois whose family has been in the banking business for generations, said the current situation struck him as similar to past downturns.
"The banking system did need to slow down," Fitzgerald said. As it does, riskier customers are being turned away. At the same time, banks that overextended are now forced to turn away even good customers. The challenge for Chain Bridge, he said, is identifying the worthwhile customers. The bank has plenty of money to make good loans, he said.
