Smaller banks may also find that they are able to win good, solid business away from their national competitors, if customers turn away from large banks as a consequence of the crisis. But community banks cannot count on this happening. As a result, some banks may reach further out on the risk spectrum to relieve earnings pressures.
We have seen these actions in the past, for example, when banks have engaged in ill-conceived investment securities leveraging programs or entered the subprime credit card market to expand their income. Others may be tempted to cut back on critical riskmanagement infrastructure, such as loan review, to pare expenses and enhance returns.