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What the improving health of banks means to you

January 17, 2012

| MoneyRates.com Senior Financial Analyst, CFA

There were 92 bank failures in the U.S. last year. Five years ago, that number might have seemed shocking, but it's a sign of the recent times that this total represents a distinct improvement.

Last year's 92 bank failures represented a 41 percent decline from 2010's total, and marked the first time since 2008 that the number has been under 100. What is even more impressive is the improvement in the amount of deposits affected. This has declined year-by-year: from $234 billion in 2008, to $138 billion in 2009, to $78 billion in 2010, and finally to $31 billion last year.

That's not just good news for banks and their shareholders. Every participant in the banking system, such as depositors in savings accounts, mortgage borrowers, and businesses seeking loans, has a stake in the health of that system.

The new normal?

Does this mean things are getting back to normal? That depends on what you define as normal. For example, in 2007 there were just three bank closings, affecting a little more than $2 billion in deposits. That's what a truly quiet year looks like.

On the other hand, the industry has seen worse periods for closure activity than even the past four years. Due largely to the savings & loan crisis, the decade from 1983 through 1992 produced 2,242 bank failures, or an average of 224 per year. It's a reminder that no one -- not banking executives, legislators, or consumers -- should ever take the health of the banking industry for granted.

What's in it for you?

So why do you care if some banks go out of business? After all, your bank may not have been affected, and you are protected by FDIC insurance anyway. Even so, here are four ways fewer bank closings could benefit you:

  1. Stability. FDIC insurance or not, having to change banks would be a nuisance, especially if you had to do it under duress.
  2. Service. When banks are having financial trouble, service is one of the first things to be cut. This includes telephone representatives, branches, and customer perks. The healthier banks are, the better the service you are likely to receive.
  3. Interest rates. When banks are weighed down by financial setbacks and rising FDIC insurance assessments, they can't afford to pay as much interest on CDs, savings, and money market accounts. If you want to see higher rates, root for healthier banks.
  4. Availability of loans. The rash of bank failures has largely been due to bad loans, and when banks are burned by defaults, they are less likely to lend new money. As the health of the banking system improves, loans will be more readily available to individuals and businesses.

The drop in the number of bank closures -- and in particular, in the amount of deposits involved -- during 2011 was a step in the right direction. But the industry will have to build on this momentum in 2012 for conditions to truly feel normal again.

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