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Will Small Banks Squeeze Customers to Repay Loans?

As hundreds of small financial institutions struggle to repay federal bailout loans, analysts say customers should expect to lose out on some of the longtime perks of banking locally.

At least 351 small banks with $15 billion in outstanding bailout loans face a “significant challenge” in raising new funds to repay the government, according to the Troubled Asset Relief Program. The inability to repay in full may have immediate consequences for investors and customers of small and medium size banks, says Steve Casselberry, chair of the banking and finance department at law firm Michelman and Robinson in Orange County, Ca. “Anything that will increase their costs, in this case their ability to pay back federal loans, factors into lower dividends for investors and higher fees for customers,” he says.

Banks have managed to keep fees low and branches open but the inevitable cannot be put off much longer, experts say. “There’s going to be belt-tightening,” says Bartlett Naylor, financial policy advocate at Public Citizen, a non-profit group. “As they move to electronic platforms to cut costs it will mean less staff,” he says. Odysseas Papadimitriou, chief executive of, says local banks will eventually have to cut back hours at their local branches, offer higher fees on savings accounts, loans, credit cards, and checking accounts. (The American Bankers Association was not immediately available for comment.)

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To be sure, those within the industry say smaller banks will find other ways to compete with larger institutions. Terry Jorde, senior executive vice-president and chief of staff at the Independent Community Bankers of America, says, “The whole relationship with their customer is important to community banks,” she says. “They would rather make loans than raise fees.” She says community banks that have suffered during the recession or are struggling to pay back federal loans “need to ride out this economic recovery and make loans when loan demand increases in their community.”

That said, it doesn’t help that the most appealing features of small banks to many customers – low fees and personal service – are also expensive to maintain, says Mike Moebs, CEO of research firm Moebs Services. What’s more, cost-cutting measures could make banks less competitive in their markets and vulnerable to takeover, says Ben Woolsey, director of marketing and consumer research at Cutbacks might also convince customers to look to larger firms with slicker online banking. “Larger or fitter banks will simply acquire unprofitable institutions or fill the void if they fail, assuming the markets in which they operate offers sufficient demand for banking services,” says Dennis Moroney, senior analyst at TowerGroup consulting firm.


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