This article makes a compelling case; but, I wonder if the big bank/small bank portfolio composition is truly an "apples to apples" comparison. Government data doesn't provide the means to qualitatively differentiate between loans secured by investment quality real estate sponsored by well capitalized investors and neighborhood quality real estate sponsored by local investors, who in many cases are thinly capitalized entrepreneurs. Moreover, the data doesn't provide leverage levels or differentiate between strong or weak markets. Smaller banks typically, have higher concentrations of exposure to local home builders who have been particularly hit hard by the recession. These builders are often thinly capitalized, highly leveraged and highly vulnerable to even small economic swings. Constrained by loans to one borrower limits, smaller banks are unable to play in the same space as the larger banks, unless they do so via loan participations. In most cases, though, the larger banks have set floors of $10MM for minimum participation levels, which means that most banks under $2 billion in assets are not likely to be involved in such transactions.

The combination of higher concentration levels of exposure to CRE loans as a percentage of total portfolio together with the higher concentraton levels of exposure to weaker borrowers and local real estate should clearly worry the regulators more than the exposures of larger banks to CRE. Moreover, smaller banks in weakened markets have less geographic diversification, which is another issue that should concern the regulators. What was once thought to be a strength of smaller banks, namely local market investing where the bankers know their customers on a first name basis, often becomes a liability when entire cities like Detroit, Cleveland, Las Vegas, etc. economically fall off a cliff.

Having said all of the above, the collective assets of all the smaller banks represents approximately 20-25% of total bank assets. This could make a difference in terms of determining how bad the situation really is notwithstanding what the article might suggest.