Wesley Allen, a Grad student at Purdue University, sends along these “bank failure plots” that show how long it takes the FDIC to close 10 banks during the recession.

The data shows that the banks are not out of the recession yet. If they can go 6 weeks with fewer than 10 bank failures, notes Wesley, then perhaps we can be more confident the financial sector is healing.

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click for larger charts

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And for some context, here is the longer term 10 year view

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Wesley further adds that there are additional notes to consider from the charts above:

1) Bank failures ARE NOT NORMAL. To those who say bank closures aren’t as bad as they were in ’09, we’re still closing banks left and right. The fact that we’re still asking “How many banks are they going to close this week?” instead of saying, “Woah! They closed a bank this week!” means we’re still in troubled waters.

2) Bank closures seem to come in waves every few weeks: one or two here, one or two there, and then a half-dozen at once.

3) Ironically, bank failures got a whole lot worse after the recession was over.  (Is this a major trailing indicator or a dire foreshadowing of things to come?)

Category: Credit, Legal, Regulation

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8 Responses to “Periodicity: FDIC 10 Banks Closings During Recession”

  1. AG Sage says:

    “Failures” in this case is actually closures, meaning the FDIC actually got around to taking care of a handful of many zombie banks they had to choose from. They had a hiring burst that is most likely reflected in the ramp up on this chart. FDIC hiring article from dec 2009.

    A more direct measure is how many banks were added to the unofficial trouble list after the recession ended. Can’t mark it to the month, because the recession ended in June and the list started in August 2009, but here’s the relevant post Unofficial Problem Bank List increases to 877 institutions. From August 2009 the list has added 740 institutions. “The average asset size of removals because of failure is $1.2 billion. Currently, the average asset size of institutions on the current list is $474 million versus $710 million on the original list. This would suggest the asset size of future failures will likely be lower.”

  2. franklin411 says:

    What a ridiculous assertion. Bank failures are perfectly normal in an unregulated environment, and that’s exactly what we had from 1980-2009. It would be utter lunacy to expect a year and a half of sane regulation to reverse the effects of 30 years of deregulation.

  3. IS_LM says:

    The periodicity is interesting. But one can easily see this as being driven by spatial autocorrelation.

  4. constantnormal says:

    The only flaw I can see in all this is that is seems to assume a stochastic process, with bank failures more or less just “happening” as a consequence of stress in the economy. HOwever, the smoothness of the curves of bank failures across time since mid-2008 belies that, and instead points to a “managed” failure rate, with the FDIC probably maintaining a queue of dead-but-not-pronounced banks that it is working off per the available work force, or political considerations, or some other thing that flies in the face of responsible oversight.

    But really, that’s just nit-picking on my part, and the point of his observations, that things will not have settled down until we can go the “6 weeks with fewer than 10 bank failures” seems sound.

    Of course, if this becomes the general perspective, and the FDIC is merely “working a queue of dead banks”, then they could easily suspend processing for a couple of months, just to build public CON-fidence. Whatever tricks they are using to keep these dead banks operational until they get around to dressing the corpse would surely work in this manner as well.

  5. constantnormal says:

    One wonders to what extent the ZIRP and mark-to-make-believe are masking the true extent of the problems in the banking system.

    In my more cynical moments, I suspect that if we were to return to mark-to-market, and attempt to operate a free and fair market economy, we would be faced with a veritable blizzard of bank failures not unlike what led FDR to close all the banks for a 3-day “cooling off period” and when they reopened, there was federal deposit insurance in place to provide some sorely-needed confidence in the banking system.

    Of course, that would not work today, because the bank failures today are not being driven by runs on the banks (we have FDR’s FDIC insurance), but by a firestorm raging in the nation’s real estate.

    Plus, there is no one in the government today with the knowledge of the financial world that FDR had, or the strength of will and forceful personality that he used so effectively to end the banking chaos. If today we distilled the entire federal “leadership”, I doubt that we could collect enough actual leadership to fill a thimble.

    However, while FDR ended the banking chaos in short order, he was unable to quickly bring an end to the Depression, and it remains an open question today the exact mechanisms by which the Great Depression came to an end, with many partisans claiming they have all the answers, but none of them seem to work in today’s situation.

  6. super_trooper says:

    So, when will the rate decrease? will this be a Gaussian distribution and we are at the peak? Or do experts forsee there being more banks closed next year?

  7. Ramstone says:

    Didn’t we snarkily observe recently that bank regulators take August off? I suspect FDCI prioritizes shutterings using triage.

  8. Mr. Math says:

    Bank failures are deflationary.