The Congressional Oversight Panel (COP) released a sobering report on the banking system today.
While things are looking better, banks still have toxic assets on their books. Those assets could continue to bring banks down in a weak economy.
The COP (serving as "bailout cops") suggests that if things get worse, small banks in particular will suffer:
"The problem of troubled assets is especially serious for the balance sheets of small banks. Small banks‘ troubled assets are generally whole loans, but Treasury‘s main program for removing troubled assets from banks‘ balance sheets, the PPIP will at present address only troubled mortgage securities and not whole loans."
Whole loans are loans the bank made and kept - as opposed to selling them to others to spread risk. Smaller banks have more exposure to whole loans and less padding to absorb a loan gone bad.
Now, there's nothing wrong with small banks. Some argue that they've suffered unfairly in this crisis. As long as your bank is FDIC insured and you're under the limits, your money is safe.
If you use a small bank (one that's not "too big to fail"), take a moment to consider what would happen if the bank fails. For many customers, it would be a non-event. However, consider your transactions and balances and make sure you won't get into any trouble.
Further Reading: