More Bank Closures

This week, the FDIC couldn’t even wait until Friday to close BankUnited of Coral Gables, FL. This has apparently been in the works since April, when the bank was told by regulators they needed to merge or sell itself.

Why did they do this on Thursday? When they usually swoop in on Friday afternoons? Well, it wasn’t so they could enjoy the holiday weekend.

The FDIC had even more work to do yesterday, as they oversaw the takeover of Strategic Capital Bank of Champaign, IL (a college town about a hundred miles south of Chicago). Elsewhere in Illinois, they took over Citizens National Bank of Macomb.

We’re up to 36 takeovers in 2009, compared to 25 total in 2008 and 3 in 2007. This list goes back to October of 2000. In fact, the FDIC is looking for ways to replenish its insurance fund through premiums, rather than asking Congress for a blank check. Remember, this money is important because it makes sure that Joe and Jane Average will be able to pay their bills Tuesday with checks drawn on Strategic Capital, Citizens National, and BankUnited.

The good news is that we are nowhere near the 534 banks closed by the FDIC in 1989, and the record for bank closings in one week by the FDIC is 18 back in 1982. However, we are rapidly approaching the levels of bank closures seen in the mid 1930s after the FDIC was formed.

Those who compare current conditions to pre-FDIC bank closures — thousands in each year between 1930 and 1933 — fail to take into account several things. First, the FDIC was part of a massive banking overhaul with lots of regulations designed to protect individuals over the interests of bank executives. Second, there were many more banks then. The FDIC only insures about 8300 institutions in 2009, where roughly 4000 banks failed in 1933 alone. They were smaller banks too, often serving one town. A “big” bank might have branches all over a state, but not all over the nation.

That brings me to the final reason we can’t meaningfully compare Great Depression era bank failures to the modern day: there was no such thing as a bank “too big to fail”. There were no bailouts nor “TARPs” to prevent big institutions from failing. Truth be told, neither of these things existed in 1989 either.

If we were to look at the assets of failed banks, add the assets of banks that would have failed were it not for government intervention, and compare it to GDP, how would that compare to the 1930s? Deregulation of “archaic” rules from the 1930s was supposed to bring innovation and make everyone lots of money; how’s that working out for us?