Advanta Latest Casualty In Failure of Small Lenders

The crisis surrounding small financial institutions is getting further underway, even as more of the largest U.S. lenders are aiming to pay back TARP funds by the end of the year.

The latest victim of that trend is Advanta, which ceased honoring recent charges last week, leaving many business owners scrambling to plug a financial gap caused by the abrupt shutdown. Over 1 million firms are expected to be affected.

Friday, white knight American Express agreed to provide some Advanta customers replacement accounts. AMEX is in much better shape than its smaller sibling Advanta. Last week, the company announced that it was intending to sell $500 million in common stock in order to reach a swift repayment of TARP funds.

Here is yet another example of a U.S. blue-chip lender using its relative strength — backed by government support — to gain market share in a lackluster small-business banking sector.

Regular readers of BNET will be aware that in recent months, at the same time as the biggest lenders have gone from strength to strength, smaller banks have fallen by the wayside. This year, a total of 36 banks have filed for bankruptcy, most of them regional and smaller in size.

Part of the problem has been that as investors have piled money into the leading financial institutions, they have been more reluctant to embrace the capital-raising rounds of smaller firms, which need the money in order to satisfy government capital adequacy requirements.

That process has left lenders such as Advanta much less capitalized than their peers, giving the larger firms a unique opportunity. Right now, that’s an opportunity that’s being seized in order to change the face of American business fast.

Related Reading at BNET Finance:

• Stress Tests & TARP Funds May Be Penalizing Local Banks
• Change In FDIC Charge To Benefit Local Banks, But Still Too Little
• As Banks Raise Billions, Barclays Fires Warning Shot