(4) Require greater diversification within the loan portfolio (most the Big Banks were allowed to get over-concentrated in certain areas)
I don’t know if I necessarily agree with this. Small banks by their nature are very concentrated when compared to how the larger banks were stuctured. Much of the problem was due to the mis-pricing of risk on sub-prime. The fact that CDS(s) were not regulated as an insurance product contributed to this. I also think that the ‘banks’ need to re-evaluate their models… which seem to be primarily ‘momentum’ based as opposed to fundamentals. This pyramid collapsed when the greater fool could not be located (because the greater fool could not buy in – wages had not kept up with price increases). Up to then, all of the creative financing was to allow the greater fool to buy in at ever increasing prices.[/quote]
Actually, very few community banks will fail due to concentration in sub-prime (those loans were found in large institutions – WAMU and Countrywide, etc. – and securitizations). Community banks are over-concentrated in Construction and Development and CRE. I would ALSO require greater loan portfolio diversification for community banks, don’t get me wrong. Too many institutions – both big and small – are over-concentrated in certain areas.
