by Erik Keith

Created on: March 26, 2009

Study: Megabanks VS Community Banks
Healthy Community Banks Unfairly Impacted and Consumers Should Heed Wake-Up Call

As the economic crisis puts a spotlight on the obscure world of credit default swaps (CDS), an unregulated $62 trillion market that most people never heard of and even fewer understood, the fear of a CDS catastrophe is haunting the country's largest banks, and the nation's healthy community institutions and consumers are paying the price.

An analysis of FDIC data as of 12/2008 conducted by BancVue (www.bancvue.com, a leading provider of products and consulting to community banking institutions, shows that commercial banks $10 billion or larger have just over $24 worth of credit derivatives for each dollar of equity. By comparison, the rest of the industry has essentially one-tenth of a penny of CDS for each dollar of equity. Those numbers translate to the big banks having roughly 23,000 times as much credit derivative exposure versus all other community financial institutions.

This comes at a time when megabanks are already reeling from write-downs on mortgage-related securities. "These are the same institutions that themselves have either directly or through subsidiaries invested in the subprime market," said Don Shafer, Chairman of BancVue. "After suffering losses all over the place, the megabanks are now waiting for the next shoe to drop. In the meantime, it's placing an undue burden on healthy small banks and should serve as a wake-up call to consumers."

Since the mortgage-backed securities that many swaps were supporting began to lose value in 2007, investors have feared that the swaps, originally meant as a hedge against risk, could suddenly become huge liabilities. While the CDS marketplace is completely unregulated and the swaps trade without a central clearinghouse, it's known that commercial banks are among the most active participants. According to the Comptroller of the Currency, JP Morgan Chase, Citibank, Bank of America, and Wachovia were ranked the top four most active players.

In February, federal regulators facing a cascade of bank failures depleting the deposit insurance fund raised the fees paid by U.S. financial institutions.
Although the FDIC intended on charging more from higher risk banks, they also suggested levying a hefty emergency premium in a bid to collect $27 billion this year. The higher premiums being assessed were originally set for 20 cents for every $100 of insured deposits levied equally on the 8,305 federally insured

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