49 Bank Failures Thus Far

Thursday, April 09, 2009

The Federal Deposit Insurance Corporation reports 49 bank failures since January 2007. The spike in the rate of closings occurred in late 2008, after the US government allowed Lehman Brothers to go bankrupt. Credit markets froze and many banks having made ill-advised loans to unqualified homebuyers found themselves insolvent as defaults rose. While we lost two of the nation's largest investment banks, this crisis has been fairly moderate by historical standards. The FDIC deposit guarantees proved effective in avoiding a major run on banks.

Throughout the savings and loan crisis of the early 1990s, 745 S&Ls failed around the United States as similar aggressive lending practices returned to haunt these institutions when the real estate market collapsed. The Great Depression of the 1930s saw the collapse of over 5,000 banking institutions prompting massive government action to stregthen the system. These interventions have gone a long way in preventing overleverage and runs on banks in times of panic. Yet, the deregulation of investment banks allowed incredible leverage to exist in the system creating a primary cause of the ensuring credit crunch when recession hit.

Today's crisis looks somewhat minimal in a historical context. Given the vastly greater number of banking institutions in the United States now, the failure of only 49 seems nominal. Comparisons to the Great Depression have likely been overstated and the system remains fundamentally sound. We are looking for this rate of failures to fall drastically as banks stabalize and the government's efforts to unfreeze credit markets filter through the system.

Note: This chart does not include non-FDIC insured banks, namely Bear Stearns and Lehman Brothers.


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