Monday, October 21, 2013

A couple of facts about small bank failures in the US

There are still a number of misconceptions with regard to the volume and the causes of most commercial bank failures in the US after the financial crisis. Here are a couple of facts that some may find helpful:

1. Although 2008 saw some spectacular bank failures such as Citi, WaMu, and Wachovia (note that Bear, Lehman, Merrill, and AIG were not banks), the actual number was dwarfed by the Savings and Loan Crisis in the late 80s. Nevertheless there were nearly 500 small and regional banks that failed over the last 5 years.

Number of US bank failures per year

2. Contrary to popular belief, the biggest reason for bank failures was not the losses associated with bad small business loans, derivatives, or even residential mortgages. Just like during the Savings and Loan Crisis, it was the overexposure to commercial real estate loans that brought many banks down. And it was the commercial real estate loans that saw the worst default rates. The chart below shows the delinquency rates by major loan type for smaller and regional banks (ex top 100).

Source: FRB

Some argue that smaller banks did more relationship-driven lending than their larger cousins. True, but that type of lending was exactly what often ended up in an FDIC takeover. Bankers' cozy relationships with local developers were prevalent and often ignored by the regulators.
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