A Brief History of U.S. Bank Failures

The Biggest Reasons Banks Fail and How to Protect Yourself

Read today’s headlines, and many of us are driven farther into fear. The more we read about recent bank failures, the more we might wonder what the Spin Machine doesn’t want us to know.

Bank Failures and Protecting Your Money

Bank failures have been a part of American history since the country's earliest days. The reasons for bank failures are varied and can include everything from fraud and mismanagement to economic crises and regulatory failures.

In this article, we will explore some of the biggest reasons banks fail in the United States and look at some of the most notable bank failures in recent history. Considering the biggest reasons banks fail, we can expect bank failure to remain part of the business of life.

Always do your best to choose a well-established bank with a strong reputation for safety and security. Check the bank's ratings and reviews, and make sure it is FDIC-insured.

Be responsible for your security. Use a strong password and secure password manager. Monitor your accounts regularly. Use two-factor authentication. Limit access to your accounts and passwords. And always be sure to keep your contact information up-to-date.

A Brief History of U.S. Banks

The history of the U.S. banking system dates back to the country's early days, with the first bank, the Bank of North America, established in 1781. However, it wasn't until the early 19th century that the U.S. banking system began to take shape.

During this time, state-chartered banks were established throughout the country, with the number of banks increasing from just five in 1800 to more than 1,600 by 1837. However, these banks were largely unregulated, leading to problems such as bank failures, bank runs, and inflation.

In response to these problems, the U.S. government established the National Banking System in 1863, which created a national currency and a system of national banks subject to federal regulation. This helped to stabilize the banking system and reduce the risk of bank failures and other problems.

Over the years, the U.S. banking system has continued to evolve and change with new regulations and innovations such as electronic banking, ATMs, and online banking. Today, the U.S. banking system is one of the largest and most complex in the world, with thousands of banks and other financial institutions operating throughout the country.

Most banks are safe. Therefore, our money is generally safe. Despite its size and complexity, the banking system remains a crucial part of the U.S. economy, providing essential services. The safety and convenience of modern-day banking in the U.S. explain why most don’t stuff money under their mattresses or bury it in the backyard.

FDIC Failed Bank List

Based on the information provided by the FDIC's "Failed Bank List" on their website, the number of banks that have failed in the United States has varied significantly from year to year.

However, if we look at the historical data over the past two decades, the average number of bank failures per year in the United States is approximately 14.7.

It's important to note that this is an average. The number of bank failures can vary significantly yearly based on factors such as economic conditions, regulatory policies, and industry trends.

For example, during the financial crisis of 2008-2009, the number of bank failures increased significantly, with 140 banks failing in 2009 alone. In contrast, there were only three bank failures in 2020, the lowest number since 2006.

The Biggest Reasons Banks Fail

"Bankers are just like anybody else, only richer." - Ogden Nash, poet

1. Poor Management Practices

One of the most common reasons for bank failures is poor management practices. Banks engaging in risky lending practices that fail to manage their risk or make poor investment decisions adequately are likelier to fail. This was the case during the financial crisis of 2008-2009 when many banks failed due to their investments in risky mortgage-backed securities.

2. High Levels of Bad Loans

Another common reason for bank failures is high levels of bad loans. Banks that lend money to borrowers who are unlikely to repay their loans are more likely to experience losses, which can lead to insolvency. This was a significant factor in the savings and loan crisis of the 1980s and early 1990s, which saw hundreds of savings and loan institutions fail due to bad loans.

3. Insufficient Capital Reserves

Banks must maintain a certain level of capital reserves to protect against losses. When banks do not have sufficient capital reserves to absorb losses, they may become insolvent and fail. This was the case during the financial crisis of 2008-2009 when many banks had insufficient capital reserves to absorb the losses from their investments in risky mortgage-backed securities.

4. External Economic Factors

External economic factors can also contribute to bank failures. Economic downturns, recessions, and changes in interest rates or inflation can all impact the financial health of banks. For example, during the Great Depression of the 1930s, many banks failed due to the economic downturn and widespread bank runs.

Notable Bank Failures in Recent History

1. Washington Mutual (2008)

In September 2008, Washington Mutual, one of the largest banks in the United States, failed due to its exposure to risky mortgage-backed securities. The bank had been struggling for several months and was ultimately seized by the Federal Deposit Insurance Corporation (FDIC) and sold to JPMorgan Chase.

2. IndyMac Bank (2008)

In July 2008, IndyMac Bank, a California-based savings and loan institution, failed due to its high exposure to risky mortgage loans. The bank was seized by the FDIC and sold to a group of private equity investors.

3. Colonial Bank (2009)

In August 2009, Colonial Bank, a regional bank based in Alabama, failed due to its involvement in a $2.8 billion fraud scheme. The bank was seized by the FDIC and sold to BB&T.

4. BankUnited (2009)

In May 2009, BankUnited, a Florida-based bank, failed due to its exposure to risky commercial real estate loans. The bank was seized by the FDIC and sold to a group of private equity investors.

5. Guaranty Bank (2017)

In May 2017, Guaranty Bank, a Milwaukee-based bank, failed due to its exposure to risky loans and insufficient capital reserves. The bank was seized by the FDIC and sold to First-Citizens Bank & Trust Company.

In conclusion, bank failures are not new. They are a part of the financial landscape in the United States and can occur for various reasons. Poor management practices, high levels of bad loans, insufficient capital reserves, and external economic factors can all contribute to bank failures.

Do your best to sleep well tonight knowing your money is relatively safe.