Failed banks are never good news, but a recent slowing in the bank failure rate provides “less bad” news for the American economy.
A total of 44 banks failed in the first five months of 2011, about one-third less than the 65 banks that failed from January through May of 2010. While the number of failures remains historically high, the slowdown indicates that the banking industry is beginning to stabilize after nearly collapsing in 2008.
Between 2003 and 2007, only ten banks failed, the lowest five-year failure total in the entire history of the Federal Deposit Insurance Corporation, the primary federal agency supervising banks. Among other things, the FDIC insures individual bank deposits up to $250,000.
“As it happened, this was the calm before the storm,” said Sheila C. Bair, chairman of the FDIC, addressing Congress in late May. Since the end of 2007, the FDIC has moved in to resolve 365 failed banks holding $659 billion in assets. The banks managed 30.6 million deposit accounts with $427 billion in deposits.
“These failures included some of the largest and most challenging resolutions the FDIC has ever undertaken,” Bair said. While only 25 institutions failed in 2008 they included Washington Mutual Bank with $299 billion in assets and more than 2,000 branches located in 15 states.
“Following the string of large failures in 2008 and 2009, the recent trend has been toward the failure of smaller institutions,” Bair said. From 2009 to 2010 the average size of failed institutions fell by half to around $600 million in assets. At the same time, the number of failed institutions increased to 157 in 2010. Through April 2011, the failures have drained $85.4 billion from FDIC insurance pool, funded through insurance premiums paid by banks.
“While the number of failures remains elevated, we expect that 2010 will ultimately proved to have been the peak year for bank failures in this cycle,” Bair said.
Bank failures have been concentrated in Florida, Illinois and Georgia, with the Pacific Northwest, West and Southwest and upper Midwest also taking hard hits, said David Barr, a spokesman for the FDIC. The crisis, now shifting from the home mortgage sector to the commercial real estate sector, is having a greater impact on local and regional banks, which hold a greater percentage of their assets in commercial loans.