04/23/2009 05:12 am ET | Updated May 25, 2011

The US has Over 6,000 Small Banks: The Government Should Use Them

If 1 trillion dollars would have been channeled through the 6,000 plus small banks we have in the US, these banks would have been strengthened and the dollars would have potentially reached millions of households, firms, and pension funds. It is also one way of beginning to build a distributed, locally based banking system. We have learned the hard way that having a few big banks account for most of the credit capacity in the system is a bad idea.

The research on small banks also shows that they often help small firms and lower income households, partly because they know the local conditions and can gauge the soundness of borrowers in a local context -- which provides them with far more information about the borrower. We need the big banks for big projects and big firms, but not for the basic banking services of the vast majority of households and small firms.

Below is a breakdown of the small banks as of 12/31/08 according to the FDIC. Since then a few may have closed but we also know that A. new small banks have been opened, and B. many are actually doing very well as people move their savings accounts from large to small banks. More than two-thirds of all insured institutions were profitable in the fourth 2008 quarter, but their earnings were outweighed by large losses at several big banks. Total deposits increased by $307.9 billion (3.5%).

Note that there were 2,784 banks with assets under $100mm and 3,790 with assets from $100mm to $1B. Those are very reasonable concentrations of capital. Clearly, these banks cannot take care of huge projects, but they can take care of the needs of 80% of the US population and many of the small and medium sized firms. They should be strengthened.

- as of 12/31/2008: 8305 FDIC insured institutions in the US

- as of 12/31/2007: 8534 FDIC insured institutions

- as of 12/31/2006: 8680 FDIC insured institutions

Broken Down by Size for 12/31/2008, All Commercial Banks in the US

- Assets less than $100mm (national): 2784

- Assets $100mm to $1B: 3790

- Assets move than $1Bn: 511

And Here Some More Detail For Savings Institutions for 12/31/2008:

- All Savings institutions (national): 1220

- Savings institutions with assets less than $100mm: 347

- Savings institutions with assets b/w $100 to $1Bn: 709

- Savings institutions with assets more than $1B: 164

(All data from the FDIC).