In 2010, 157 banks were closed/taken over by the Federal Deposit Insurance Corporation (FDIC). This surpassed 2009, in which a total of 140 bank failed. In fact, 2010 saw the highest number of bank failures since 1992.
In 2008, the FDIC reported 25 bank failures, and there were 3 in 2007. In the five years prior to 2008, only 11 banks in total had failed. The failure of Washington Mutual Bank (WaMu) in February of 2008 with assets totaling $307 billion was by far the largest US bank failure in recent history.
Furthermore, 860 institutions were on the FDIC’s “problem” banks list as of September 30, 2010, the highest number since 1992. The table below shows the number of FDIC bank failures from 2007 to 2010, as well as the cumulative assets, by year, of the failed banks.
Assets of these failed banks in 2010 totaled $96.5 billion, a drop of 43.5% from 2009′s total of $170.9 billion. The estimated cost to the FDIC of these 2010 bank failures was $22.4 billion.
The cause of so many bank failures the last few years has been due to a collapse of the financial system. This has been caused by a variety of factors, including a softening of the housing market, the increase in mortgage delinquencies and home foreclosures, and the credit crisis.
All of these factors have led to a dramatic increase in bank failures over the past few years. These banks have failed because of inadequate capital and accumulating loan losses primarily from residential mortgages and, more recently, from commercial loans.
When banks fail, they cannot meet their obligations to depositors and others, and the FDIC is appointed as receiver. In this case, the FDIC assumes the responsibility of disposing of the failed bank’s assets in a manner that maximizes their value. The FDIC also settles the failed bank’s debts, including claims for deposits in excess of the insured limit. The FDIC protects depositors with deposit insurance up to the $250,000, which represents the FDIC insurance limit. This amount was raised in 2008 from $100,000 as a result of the Emergency Economic Stabilization Act of 2008.
In most cases, the FDIC arranges for the branches and insured deposits to be transferred to another well-capitalized bank, and banking services for the failed bank’s customers generally continue uninterrupted.
For instance, in 2008 when WaMu failed, FDIC regulators simultaneously brokered the sale of most of WaMu’s assets to JPMorgan Chase, which planned to write down the value of Washington Mutual’s loans at least $31 billion. A bank failure does not change the borrower’s obligation to make payments and comply with the terms of their loan, but the FDIC does provide insured depositors with prompt access to their funds.
Bank failures have left the FDIC insurance fund in the red; however, the agency is confident that it will have more than enough money to meet the anticipated cost of failures through 2014. FDIC officials presume that the number of bank failures has peaked in 2010 after climbing steadily over the last several years.
Hopefully we’ll see fewer bank failures in the next few years, which should allow the FDIC to re-supply its insurance funds in anticipation of any potential future bank failure problems.
Published or updated April 3, 2013.