According to the FDIC failed banks list, 40 banks had failed in the U.S. by May 6, 2011. Including the banks that had failed from 2008 to 2010, the total number of failures had reached 362. The financial crisis is to blame for the hundreds of banks that were forced to close, but now that we’ve exited the recession (at least officially), what will it take for these failures stop?
Bank Failures Have Slowed but Still Continue
At the end of April, regulators shut down banks in Florida, Michigan and Georgia, followed by another bank in Florida on May 6. This boosted the total number of failures to 40 for 2011. This has already surpassed the total number of banks from the years 2000 to 2007, which was only 27 nationwide.
Experts said last year that 2010 would likely be the peak in bank failures, and so far that holds true. By May 7 of last year, 68 banks had failed and closed down. In fact, the total for that year reached 157, which is not expected to occur again this year.
However, just because bank failures have slowed doesn’t mean they have stopped altogether. The fact that this year alone, we’ve already surpassed a number that hadn’t even been reached over a 7-year period in the past shows that banks are still in trouble.
So why are banks still suffering?
Why Banks Can’t Seem to Stop Failing
The reason we keep seeing failed banks has a lot to do with why banks fail in general. Here are the main reasons that we might see a bank fall apart:
- Excessive withdrawals: If a large number of depositors panic for some reason and withdraw their money, the bank, which is required to keep a certain percentage of deposited money on hand, cannot stay afloat. This is a problem that hit WaMu before it fell hard in Sept. 2008.
- Inability to borrow: Another issue that could result in a bank failure is the inability to borrow money from other banks. This usually occurs when a bank’s Standard & Poor’s credit rating drops, as did WaMu’s, and other banks become afraid to conduct business.
- Low reserves: A bank is required to have its own reserves at all times. If these reserves get too low, the bank has a big problem. Typically, the Tier-1 capital ratio, which is the ratio of a bank’s core capital compared with the total of its risk-weighted loans along with other assets like cash, is the most closely watched. If a bank’s ratio falls below 6 percent due to having too many risky loans, it is in trouble.
The banks that have failed to date have experienced these types of problems. Again, the above issues were brought on by participating in risky lending and securities activity or simply being the victim of a suffering economy.
The Impact of Bank Failures on the Economy
In 2008, the S&P alone dropped 38 percent. When a drop like this occurs, it’s often difficult for banks to bounce back. And with many large companies also closing down as a result of crisis, many banks have not been able to restore the formula necessary to stay afloat.
The good news is that is that bank failures typically do not impact depositors unless their deposits per account surpass $250,000, which is now the permanent FDIC insurance limit. Accounts that are FDIC insured have a guarantee that the money on deposit will be protected in the event of a bank failure.
Further, banks often buy each other out so that, with the exception of name changes and maybe a few other subtle adjustments, many bank account holders don’t experience any indication that their bank has failed at all.
However, one problem with bank failures is the lack of financial institutions in certain communities. It was noted in 2010 that millions of homeowners are underbanked, which often has to do with the fact that banking establishments have closed in low-income neighborhoods, eliminating banking options for many.
Unfortunately, banks are expected to continue failing, albeit not as rapidly, for the remainder of the year. While the FDIC discloses a list of failed banks, it doesn’t share its failed banks watch list to the public to protect banks from panicked customers who might bail unnecessarily, dooming its fate. This means we can’t know for certain which banks are in danger of failure.
As of the end of last year, 884 banks were said to be on the list. With 40 having failed so far in 2011, it’s apparent that the threat of more failures is something we could face in the months, and possible years, to come.
FDIC insurance is much more complicated than $250,000 per account. In fact this is just plan wrong. There are a bunch of other variables, such as ownership that effect your FDIC coverage. Please consult your banker or visit the FDIC and use their calculator at https://www.fdic.gov/edie/index.html.