With the country’s biggest banks barely escaping failure, the future lies with regional banks, says superstar bank analyst Meredith Whitney, who now has her own firm.
Asked by The Wall Street Journal what the banking sector will look like in five years, Whitney said, “It’s almost like you go back to go forward.”
The problem with large banks is that “the biggest correlation between default and underwriting is distance,” she says.
“We’ve gotten so far away from knowing your borrower and knowing your lender. So I think that you go back to very much a regional-type lending environment.”
Many regional banks are in good shape, she says, and didn’t need any government assistance.
“I think they will grow and consolidate,” Whitney says. “They will not be as big as the national entities — the top [of which] was six banks — but they’ll be of a big enough scale.”
The biggest problem these banks will face is concentration of lending, she says.
“Five banks control two-thirds of mortgage origination and two-thirds of credit-card loans and lines outstanding. So to disgorge that is what we have to do to get liquidity back in the system.”
Policymakers have to figure out a way to make it possible for smaller banks to vastly increase their loan originations, Whitney says.
Federal Reserve Chairman Ben Bernanke apparently shares Whitney’s enthusiasm for regional banks. In a recent speech, he said small banks could play a key role in spurring the nation’s economic recovery.
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