Bank failure rates show signs of easing
July 19, 2011
Interest rates on savings accounts ended the first half of 2011 as low as ever - with a national average of 0.14 percent. Still, there was some good news for savings accounts in the first half of the year. Bank failure rates have dipped to their lowest levels since the financial crisis began.
Make no mistake about it - bank failure rates are still too high, but finally they are moving in the right direction.
Bank failure rates in 2011
According to the FDIC, 48 U.S. banks failed in the first half of 2011. How could the failure of 48 banks be good news? Because if this pace continues, there would be 96 bank failures in the U.S. this year, the lowest total since 2008.
In 2008, as the financial crisis began, there were 25 U.S. bank failures. This ballooned to 140 failures in 2009, and even as the system overall stabilized, the number of bank failures continued to rise in 2010, when 157 institutions failed.
In this context then, getting the bank failure rate under 100 in 2011 would be a step in the right direction. Also, there are other encouraging signs from this year's bank failure statistics.
For example, so far none of 2011's failures has been one of the top-tier banks--those with $10 billion or more in deposits. Indeed, 45 of the 48 bank failures in 2011 have been banks with less than $1 billion in deposits, which would make them relatively small players in the industry.
Further, the pace of bank failures may be slowing as 2011 progresses. Banks failed at a rate of nearly ten a month in the first four months of 2011. Since then, there were just five failures in May, and four in June.
There's no real benchmark for what an "acceptable" rate of bank failures would be, but the pace of the trend is very important. Slowing bank failure rates make the problem more controllable. Accelerating bank failure rates create the possibility of the problem becoming impossible to contain. In short, what we have today is still a problem, but one that seems manageable.
Impact on depositors and savings account rates
Do bank failure rates concern depositors whose banks are healthy? To some extent they do, for two reasons:
- The banking system is interdependent. It became painfully clear in 2008 that the problems of one bank could quickly infect other banks. Bank failures are destabilizing to the system; the more failures there are, the more unstable that system becomes.
- Bank failures cost money. FDIC deposit insurance saves depositors from the most calamitous effects of a bank failure, but that insurance is not without cost. The FDIC charges a levy to banks to pay for deposit insurance, and the more bank failures there are, the greater the cost burden is on surviving banks. In turn, banks pass these costs along to customers - you won't see them directly, but they'll show up in the form of higher checking account fees, lower savings account interest rates, etc.
All-in-all, the picture painted by bank failure rates in the first half of 2011 is one of a patient that is starting to get a little better, but is far from fully recovered. It's a sign of hope, but with the need for continued vigilance.