Rosengren, Eric

Smaller banks have generally not held these complicated financial instruments, so they have been more insulated from the financial turmoil.7 They also have not been liquidity providers for securities, so they have experienced less unexpected growth in their assets. As a result, there have been far fewer complaints from small and medium sized businesses – generally the clients of smaller banks – about credit availability.

However, it is important to note that the continued health of small and medium sized banks will be impacted should residential and commercial real estate prices decline in a severe manner. While that is not my forecast, it is only fair to note that for the liquidity problems to be confined it is important for collateral values to stabilize. Significant price declines will likely lead to more residential and perhaps commercial mortgage defaults not necessarily limited to the subprime market, and thus more likely linked to mortgages held in portfolio by smaller banks.8