In the last several weeks, anyone watching the news, reading a newspaper, or who was banking with one of the failed big banks knows the reality of the current banking crisis. Most people know however, that to date; only a few depositors have lost any money when a bank has failed. Bank shareholders have suffered dramatically, but they aren’t the average Joe.
What seems to be scaring so many people is that there are a number of major simultaneous economic events happening at one time. These events have seemed to cause a domino effect across our economy and are affecting everyone. We have seen some very large, previously strong banking institutions fail. Does that mean that your local bank is at risk?
I don’t think so.
Our last major banking crisis occurred between the mid 1980s, culminated about 1990, and was over by 1995. During that period more than 1,600 banks insured by the FDIC failed. The banks that did fail were not the large money center banks like WaMu and Wachovia, rather they were small and mid-sized community banks. For the most part, bank failures occurred in all parts of the country.
During the crisis of the 80s and 90s, individual banks failed for a variety of reasons. The recession of 1982 caused real estate values to drop, businesses to closes, farm foreclosures, and local banks to fail or merge with larger banks. During the late 1980s and 1990s, banking regulators toughened their standards in many areas that were the cause of the many bank failures of the time. Other than the recession of 1982, there wasn’t one single factor that precipitated the banking failures.
Fast forward to today. The FDIC currently is expecting about 120 banks to fail in the next 12-24 months. The chairwoman of the FDIC believes these failures will happen very rapidly over the next several quarters. In today’s crisis, there is one central reason for the large money center bank failures which is the impact on their involvement in the sub-prime residential mortgage lending that was so prevalent during the last few years. Small community banks rarely made a sub-prime mortgage loan, nor did they securitize and trade in mortgage backed securities like the investment banks and money center banks did.
So far during 2008, less than 20 banks have failed or were acquired during the days leading up to a banking regulator takeover. Nearly all of these banks were money center banks that suffered huge losses as a result of originating, securitizing, or trading mortgage backed securities. Of the 120 banks that are on the FDIC watch list, many of them are believed to be in
These banks have been heavily involved with financing speculative real estate development in markets like
The good news is that it is only a small percentage of the nation’s “main street” banks are truly at risk of failure today. Most community banks that survived the 1980 banking crisis learned a great number of lessons which they practice today. Banking has also become more niche oriented with many banks choosing to serve a sub-segment of the entire banking market rather than be a “generalist” bank.
I am not trying to downplay the seriousness of the current situation, however, when one thinks through the cause and effect of the current crisis and calmly thinks through their own situation, I believe they will come to the conclusion that their business, personal savings and other deposits held in US banks are at tiny risk of loss.