Bank failures drop, but remnants of crisis remain
January 10, 2014
With 2013 over, the final tally on bank failures during the year shows that the banking system continues to make significant improvement. But is this a sign of lasting reform, or simply a cyclical upswing?
Twenty-four banks failed in 2013, less than half the number of casualties in 2012, and the third consecutive year of improvement. Two statistics really put those 24 bank failures in perspective, for better or worse:
- There were 140 bank failures in 2009 and 157 in 2010, so 24 is a marked improvement.
- There were just 21 bank failures in total from 2002 through 2007, so the system still is not as healthy as it was before the financial crisis.
What this comes down to is a system that has made significant improvement, but still needs to get better. This is of vital importance to bank customers. Although all deposits up to $250,000 are insured by the FDIC, consumers benefit when there are fewer bank failures.
How bank failures impact consumers
To begin, fewer failures mean fewer customers have to go through the delays and disruptions involved in having their banks taken over by the FDIC. Most people don't like to change banks anyway, and having to change under duress is especially inconvenient.
Also, the money the FDIC uses to insure deposits comes from financial assessments the FDIC makes on all banks in the system. The more the FDIC has to tap into the insurance reserve, the higher it has to raise assessments on the remaining banks. These higher costs are in turn likely to be passed along to customers in the form of higher fees on checking accounts, lower interest rates on savings accounts or both. When there are fewer failures, it eases this cost pressure.
Finally, getting failures under control signals that the system as a whole is more stable. As valuable as the FDIC and the Federal Reserve are in stabilizing that system, when things are deteriorating conditions can reach a tipping point where they become unmanageable. The more bank failures decline, the further the system pulls back from that tipping point.
The remaining question is: Will this improvement continue?
Cyclical or systemic improvement?
While regulatory reforms have been put in place and both bankers and regulators can be assumed to have learned lessons from the last crisis, the banking system has also had some cyclical conditions in its favor:
- The housing market has improved. This has stemmed the tide of foreclosures and bolstered the value of mortgage lenders' collateral.
- Employment has picked up. More economic activity means more lending demand and fewer defaults.
- Interest rate spreads have widened. A wider spread between rates on loans and those on savings accounts means higher profits for the banks.
The reduced number of bank failures in 2013 was certainly a positive sign. It will only be clear how positive once the system is really tested again, either by the next economic downturn or by a new crisis, such as the mounting problems with student loan debt.