So far this year 106 banks have failed out of 8,195 FDIC-insured institutions, or slightly more than 1 percent of all banks. How does that compare to previous periods of financial stress and episodes of bank failures, and is there anything positive about bank failures?
This first graph displays annual bank failures (data here) from 1930 to 2009, showing the two most serious banking crises in U.S. history, the Great Depression (9,146 banks failed from 1930-1933) and the S&L Crisis (2,935 banks failed from 1980-1994). Compared to those two periods, 106 bank failures in a single year out of more than 8,000 banks in total appears pretty inconsequential.
The second graph shows annual bank failures since 1970 only, and puts some further perspective on the 106 bank failures this year, compared to the S&L crisis when almost 3,000 banks failed in total and there were was an entire decade when banks were failing at a rate of more 100 per year.
Further analysis shows that the assets of the 106 failed banks in 2009 totaled $106 billion (FDIC data here), which represents only 8/10 of one percent of the total U.S. bank assets, currently $13.301 trillion (data here). During the peak of the S&L crisis in 1989, failed bank assets were 3.5 percent of total bank assets, or more than four times the current level.
Certainly we can expect some more bank failures to follow this year, considering that there were 416 “problem institutions” listed by the FDIC in June. But by comparison, there were almost 1,500 banks on that same list in 1990, and more than 1,000 in both 1991 and 1992 during the S&L crisis.
Additionally, bank failures are currently not geographically widespread, and 16 states haven’t experienced a single bank failure in either 2008 or 2009, and another 13 states have had only one or two bank failures during the last two years. Almost half of this year’s 106 bank failures have been concentrated in only three states: California (15), Georgia (20), and Illinois (17). Even the state hit hardest by the recession, Michigan, has only seen one bank fail this year, following two last year. In contrast, during the S&L crisis no area of the country was spared from widespread bank failures.
Further, the assets and deposits of failed banks don’t disappear, they’re acquired by larger and healthier banks, which then strengthens the banking system overall. And consider that on a population-adjusted basis, the United States, with 27 banks per million population, has more than 12 times as many banks as Canada (only 2.2 banks per million). The United States probably still has too many banks as a legacy of previous legislation that forced bank to operate in a single state only (the McFadden Act of 1927, which was repealed in 1994), and the elimination of some of the smaller, weaker banks through bank failures can therefore actually be a positive development for the U.S. economy and banking system.
All in all, 106 bank failures in 2009 might sound quite ominous and it’s been getting a lot of news coverage, but putting the current banking situation in perspective suggests that we’re not yet anywhere close to an episode of bank failures like the Great Depression or the S&L crisis. And let’s hope that with an economic recovery just getting started, we’ll see the number of bank failures coming down by next year. For more information, see a 2008-2009 bank failure map here, and a 2008-2009 bank failure table here.