The Federal Deposit Insurance Corporation (FDIC) recently reported that the number of banks on its “problem list” – or those at risk of going under due to financial, operational or managerial difficulties – now includes more than 700 banks, or 1 out of every 11 banks in the country. This marks the highest number of banks in danger of closing since 1992, when the FDIC announced 1,066 were at risk.
Starting in late 2007 when signs of a recession became apparent, the number of banks regulators scrutinized has been climbing. By the fourth quarter of 2007, there were just 76 financial institutions on the list.
While the number of banks in trouble is high, it is important to realize that only a small percentage of those on the list actually shut down. In the past, an average of 13% of the financial institutions the FDIC has put on its danger list have actually shut down. In the first stages of recession in 2007, only three banks actually failed. A total of 140 lenders were closed nationwide last year, and 20 banks have gone under this year, indicating that at least the same number will be closed in total for 2010.
Experts predict that there will in fact be more closed banks in 2010 than there were in 2009, but that there won’t be as many as the peak of their index in 1989, when 534 banks were shut down. FDIC Chairman Sheila Bair attributes the increase in the amount of banks being closed at least in part to the fact that bank failures are cyclical, with the 2009 figures helping to increase the pace for the banks failing this year.
While there are 702 banks on the danger list, we will never be able to identify the majority of the banks on the list, namely, the ones that do not actually shut down. The names of the financial institutions at risk of failing are not made public for fear that depositors will lose faith and cause a “run on the bank,” where investors promptly withdraw their finances. This would obviously lead to bank failures that might not otherwise occur.
One reason the number of banks in danger has increased in the past year is that banks are being more careful than they had been previously with granting credit to investors. Banks now tend to significantly limit the amount of credit they give to both consumers and businesses alike, cutting down credit by $587 billion in 2009 – 7.5% of total credit nationwide. Bair argues that this is a definite factor contributing to the number of banks at risk. By not granting as much credit as in years past, investors are less likely to do business with a particular institution, ultimately detracting from its total resources.
Last year, about a third of all financial institutions in the country – 8,000 in total – reported a loss. Due to the economy’s slow recovery, homeowners continue to default on their property, culling more losses for the banks. The fourth quarter of 2009 did show a small all around profit for banks, however, indicating that the banks in danger may indeed be part of a cycle we will have to wait out.
