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The Sunny Side of Recent Bank Failures

Five banks went belly-up this weekend, but take heart


Five banks in four states went belly-up over the weekend, but believe it or not, the pace of failing firms only underscores the substantial progress we’ve made in recovering from the worst financial crisis since the Great Depression.

True, the rate of bank failures still is elevated by historical norms, but compared with previous years, the number of financial firms plunging into insolvency has slowed dramatically.

The most recent bank failures bring the total number of banks closed by federal regulators to 22 this year. For comparison, by this time last year the Federal Deposit Insurance Corp. had closed 34 banks. And although the failed banks were all small, with just $1.42 billion in total assets combined, their tiny size makes them something of a barometer for the health of the broader industry.

After all, the Federal Reserve’s stress tests in March showed that the nation’s largest, most systemically important financial firms appear to have enough capital to withstand another extraordinary crisis. But if the nation’s smallest banks are the canary in the financial system coal mine, then the slowing rate of failures appears to offer reassurance, too.

The rate of bank failures has dropped sharply as the industry — and borrowers — have deleveraged. The wave of closings crested back in 2010, and the trend since then suggests the worst of the crisis is firmly behind the industry. Here are the number of bank closings in each year going back to 2005, according to FDIC data:

2011: 92 bank failures
2010: 157 bank failures
2009: 140 bank failures
2008: 25 bank failures
2007: 3 bank failures
2006: 0 bank failures
2005: 0 bank failures

The number of bank failures by year followed a similar pattern for the recession that followed the bursting of the dot-com bubble, even if the scale was much smaller:

2004: 4 bank failures
2003: 3 bank failures
2002: 11 bank failures
2001: 4 bank failures
2000: 2 bank failures

Furthermore, the FDIC’s Problem Bank List, which keeps tabs on firms whose weak capital positions could lead to failure, has been easing, too. At the end of 2011, it stood at 813 institutions, down from 844 as of September 2011. Additionally, the list declined for three consecutive quarters after hitting 888 in March of last year.

Yes, that’s still a startling high number of troubled banks, and there’s little doubt more failures are coming. But it appears that the worst of banks going belly-up is well behind us. The weakest died a while ago, and — barring another crisis — the rate of bank failures will continue to slow as a beleaguered industry gradually heals.

Article printed from InvestorPlace Media,

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