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Beltway Confidential

Absent bailouts, the market can regulate banks

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Beltway Confidential,Timothy P. Carney,Finance and Banking,Analysis

Big banks attract investors, in part, through having implicit government bailouts. How do small banks attract investors? By being good.

American Banker has the story of Gulfstream Bancshares:

Unable to control the larger economy, Tranter says he decided to get the bank in the best shape it could. It increased its loss allowance for noncurrent loans to at least 200%, and it aimed to build its capital ratios to twice the regulatory minimums for well-capitalized institutions through retained earnings. If it could clear up any questions surrounding capital and credit, his theory went, potential buyers could focus on strengths like its average deposits of $120 million at its four branches.

“We wanted our metrics to be pristine,” Tranter says. “My goal was to have a deliverable book that was visible. Our earnings visibility is as good as ever. A buyer wouldn’t have to mess around with provision or our efficiency.”

It worked. The bank just sold for a premium, and the buyer has seen its stock go up since the purchase. It shows that when businesses take a long-term view to profitability, the market acts as a very good regulator.

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