Bank Failures: The Worst May Be Over

From an article by Daniel Gross "Bank Failures: The Worst May Be Over":

"A close look at the FDIC's data on recent bank failures suggests that the worst may be over. Yes, banks are still failing at a record pace. But the raw number of failed banks doesn't tell the whole story. The banks that are failing these days tend to be smaller, and have fewer deposits. And because other components of the banking industry have returned to health, the cost of these failures to the FDIC's depleted deposit insurance fund is declining.

In 2008, not many banks went belly-up — only 25. But there were some doozies, including mega-banks such as Washington Mutual and IndyMac. Combined, the 25 banks that failed had $234 billion in deposits (see chart above) and $372 billion in assets. These failures cost the FDIC deposit insurance fund, which pays out to make depositors whole, $19.9 billion. Banks that failed in 2008 had median deposits of $456 million and average deposits of $9.4 billion.

In 2009, the number of failures escalated rapidly — to 140, or nearly three banks per week. But the crisis was, in some sense, less severe than it was in 2008. The failures represented a much smaller chunk of the banking system than the Class of 2008 did. Between them, these banks had $137 billion in deposits (see chart) and $167 billion in assets. The banks that failed in 2009 had median deposits of $234 million and an average of $965 million. The 140 failures caused the FDIC's deposit insurance fund to absorb $37.4 billion in losses.

In 2010, the pace of bank failures has picked up. With 11 weeks left in the year, 129 banks have already failed. (This year's list of losers can be seen here.) So it is likely more banks will fail in 2010 than did in 2009. But those banks represent a much smaller chunk of the banking sector than the Class of 2008 or 2009. Combined, this year's dead banks had just $72.4 billion in deposits (see chart) and $84.2 billion in assets. The median deposit level of a failed bank in 2010 is $264 million and the average is $560 million. 

Meanwhile, with surviving banks returning to health, and new capital entering the industry, competition for banks taken over by the FDIC has risen. The end result: bank failures have become cheaper. By my calculations, failures have cost the FDIC deposit insurance fund about $20.15 billion so far this year."

MP: Daniel Gross is careful to point out that 2010 will "still turn out to be a debacle," but it seems clear that by several important measures (total deposits of failed banks, annual FDIC losses, the average size of failed banks in a given year, etc.) the worst of the banking crisis is definitely behind us.