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Banking & Finance AN EIGHTH DISTRICT PERSPECTIVE WINTER 1986/87 Bank Failures in the 1980s—Another Perspective alternative source of funds, the sudden loss of depositors can force the bank into failure. Once the regulator has determined that a bank is insolvent, the FDIC then decides how the bank will be handled. This determination is made primarily as a function of the cost to the deposit insurance fund. If a bank has good prospects for recovery, the least costly alternative for the FDIC may be to inject additional funds and allow the bank to continue operating. More frequently, however, the FDIC closes the bank and then has a number of alternative methods of dealing with the failure. Nationally, seven banks were rescued by FDIC infusions of funds in 1986. The failure of a bank, per se, does not mean that a community or a neighborhood necessarily suffers a reduction in financial services. In fact, the FDIC used the “ Purchase and Assumption” procedure in dealing with the majority (98) of the 138 bank failures in 1986. Under this procedure, a bank usually is closed on a Friday, reorganized over the weekend and then reopened under another bank’s name on Monday with a minimum of disruption to normal services. The acquiring bank assumes all of the failed bank’s deposit liabilities and purchases the assets of the failed bank that are considered to be of good value. Frequently, the only change that a customer perceives is the bank’s new name. In 1986, only 21 of the 138 failures were resolved using the deposit payoff method in which the FDIC pays depositors up to the $100,000 insurance limit. Additional payments to depositors with accounts over $100,000 depend on the success The Mechanics of Failure of the FDIC in liquidating the assets of the failed banks. In most cases, bank failures are a regulatory rather than The payoff method is used when the FDIC does not receive a market phenomenon. In other words, it is acceptable bids from banks to acquire the usually the bank’s primary regulator that failed b ank u n d er the P urchase and determines when an institution is insolvent. A ssum ption transaction. The 19 other The insolvency, per se, may be a result of failures in 1986 were handled by the FDIC market forces, but it is the regulator that using the deposit transfer method in which makes the final determination of insolvency. the liabilities of the failed bank are transferred THE The exception to this is the case where a bank to another bank. Under the payoff and deposit FEDERAL RESER\E is heavily dependent on uninsured depositors tra n sfe r m ethods, com m unities may RANK of who withdraw their funds upon information experience a loss or reduction of banking ST. I jOLIS services if no other new banks are created that the bank is experiencing difficulties. If and other banks in the area cannot or do not the bank is unsuccessful in finding an The growing number of bank failures has received increasing attention in recent years. The 138 FDIC-insured bank failures in 1986, including two FDIC-insured mutual savings banks, represent the largest number of bank failures since the FDIC was formed in 1933. In fact, the highest number in any year between 1943 and 1981 was 17. The assets of these failed banks in 1986 totaled $7.7 billion. The FDIC incurred costs of $2.8 billion to pay off insured depositors and to close or merge the failed institutions. The number of bank failures is not only quite large by historical standards, but its occurrence at this point in the current economic expansion has alarmed some analysts and caused them to question the stability of the U.S. banking system. Some point to the number of bank failures as evidence that the pace of bank deregulation was too rapid and that re-regulation of the banking industry is needed. Others indicate that failure is a necessary option in a competitive market and that the previously low number of bank failures suggests that the banking industry was overregulated, thereby providing a cushion that allowed inefficient banks to survive. This article provides perspective on the economic phenomena of bank failures by describing the process of bank failures and comparing bank failures in the Eighth Federal Reserve District and in the United States. Finally, the significance of the failed banks relative to the entire banking industry is examined. WINTER 1986/87 FEDERAL RESERVE BANK OF ST. LOUIS Commercial Bank Failures in 1 9 8 6 1 Federal Reserve District Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco TOTAL Failures 0 0 0 1 0 8 11 5 8 58 32 13 136 Selected States Texas Oklahoma Kansas Iowa Eighth District States2 Missouri Kentucky Tennessee Illinois Indiana Arkansas Mississippi Failures 26 16 14 10 Failures 9 2 2 1 1 0 0 1Does not include the two mutual savings banks that failed in 1986. 2The Eighth District consists of the entire state of Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. The list refers to failures in each of the entire states. provide the services offered by the failed institution. The Scope of Bank Failures Over much of the recent past, bank failures have been relatively infrequent. In the 1960s and 1970s, an average of only seven banks failed each year in the entire nation. In the 1980s, however, the number has risen sharply from 10 failures in 1981 to 120 in 1985 and to 138 in 1986. The number of bank failures in the Eighth District jumped from zero in 1981 to six in 1982. Since 1982, however, the failure rate has been steady in the District. There were four failures in both 1983 and 1984, six in 1985 and five in 1986. In 1986, the 138 failed banks represented only 1.0 percent of the total number of banks in the nation. Since the size of the average failed bank was small, approximately $50 million in assets, the assets of all 1986 failures represented only 0.3 percent of all commercial bank assets in the nation. The largest bank failure in 1986 was the First National Bank of Oklahoma with over $1.7 billion in assets. In the Eighth District, the five failures represented only 0.4 percent of the number of District banks and had combined total assets of $72.7 million; the latter represented only 0.1 percent of all District bank assets in 1986. The table indicates that commercial bank failures in 1986 were concentrated in the Tenth and Eleventh Federal Reserve Districts (Kansas City and Dallas), where 90 of the 138 bank failures were located. Both of these areas were heavily influenced by weakness in the energy and agricultural sectors. The 58 failures in the Kansas City District represented 2.4 percent of all banks in the District. Texas led all states in the nation with 26 failures, roughly 1.3 percent of that state’s banks. The assets of the failed banks represented 3.0 percent of all bank assets in the Kansas City District, but only 0.5 percent of bank assets in Texas. Nationally, 26 percent of all commercial banks are considered agricultural banks by having more than one-quarter of their loan portfolio in agricultural loans. Among the failed banks, however, agricultural lending was more pronounced. Fortythree percent (59 of 136) of the commercial banks that failed in 1986 were agricultural banks. A final perspective is that assessing the health of the banking industry by concentrating on the number of bank failures is similar to judging human population trends by looking only at death rates while ignoring birth rates. While much ado has been made about the 437 bank failures that occurred from 1981 through 1986, little or no mention is made of the even larger number of new banks that have been created over the same period. There were more commercial and mutual savings banks at the end of 1985 (15,429), than there were at the end of 1981 (15,341). The scope of this increase is even more significant when one considers that it occurred during a period of widespread bank mergers and consolidations that otherwise would reduce the number of individual banks. For example, while there were 299 failures from 1981 through 1985, over 1,700 new banks began operations. Based on the number of new banks created and on the methods used to deal with bank failures, it is difficult to argue that the increase in the number of failed banks is evidence of deterioration of the services provided by the banking system. —Kenneth C. Carraro Banking & Finance—An Eighth District Perspective is a quarterly summary of banking & finance conditions in the area served by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official positions of the Federal Reserve System. FEDERAL RESERVE BANK OF ST. LOUIS WINTER 1986/87 EIGHTH DISTRICT BANKING DATA LARGE WEEKLY REPORTING BANKS1 Rates of Change L ev el IV /1 9 8 6 ($ m illio n s) C u rren t Q u a rte r C u rre n t Year 111/1986IV /1 9 8 6 IV /1 9 8 5 IV /1 9 8 6 S a m e P e rio d s P rev io u s Y e a r 111/1985IV /1 9 8 5 IV /1 9 8 4 IV /1 9 8 5 S e le c t e d A s s e t s & L ia b ilit ie s Total Loans & Leases Commercial Loans Consumer Loans Real Estate Loans Loans to Financial Institutions All Other Loans $17,458 5,800 4,277 3,984 1,109 2,286 Total Securities U.S. Treasury & Agency Securities Other Securities Total Deposits Non-Transaction Balances MMDAs $100,000 CDs Demand Deposits Other Transaction Balances2 14.2% 15.8 26.3 26.5 10.0 -2 0 .6 11.5% 8.5 18.3 15.3 23.2 - 2 .5 9.8% 3.4 23.9 5.3 -2 7 .5 32.6 4,066 2,540 1,525 22.4 53.9 -1 4 .4 7.7 15.0 - 2 .5 - 1 .2 -1 7 .8 29.9 4.8 - 0 .7 13.5 20,551 12,120 2,794 3,587 6,305 2,124 19.3 4.3 21.5 - 0 .7 43.2 54.8 8.5 3.3 22.1 - 3 .8 14.7 28.8 10.1 3.9 11.9 11.2 21.9 24.3 3.9 2.1 14.0 -3 .1 3.2 16.4 10.1% 0.7 24.9 7.2 -1 6 .9 36.4 SMALL WEEKLY REPORTING BANKS3 Rates of Change L ev el IV /1 9 8 6 ($ m illio n s) C u rren t Q u a rte r C u rre n t Year 111/1986IV /1 9 8 6 IV /1 9 8 5 IV /1 9 8 6 S a m e P e rio d s P re v io u s Y e a r 111/1985IV /1 9 8 5 IV /1 9 8 4 IV /1 9 8 5 Selected Assets & Liabilities Total Loans & Leases Commercial Loans Consumer Loans Real Estate Loans All Other Loans U.S. Treasury & Agency Securities Other Securities Total Deposits $5,477 1,560 1,141 2,364 412 7.2% - 0 .3 20.5 15.6 -3 1 .4 8.4% 1.9 10.0 16.1 - 7 .8 2,044 10.9 4.0 - 0 .8 3.4 791 12.5 12.1 9.8 3.8 8,430 8.5 2.8 9.8 9.3 5.6% 0.6 11.7 5.8 8.8 6.3% 0.4 5.8 8.4 21.3 All data are not seasonally adjusted. 1 A sample of commercial banks with total assets greater than $750 million. Historical data have been revised to incorporate adjustment factors that offset the cumulative effects of mergers and other changes involving weekly reporting banks during 1985. These adjustment factors, which are computed each year, are used to construct a consistent time series for which year-to-year growth rates can be calculated. Adjustment factors are available upon request from the Statistics Section of the Research and Public Information Department. Rates of change are compounded annual rates. 2 Includes NOW , ATS and accounts permitting telephone or pre-authorized transfers. 3 A sample of commercial banks with total assets less than $300 million as of January 1984. 3 EIGHTH DISTRICT BANKING DATA Bank Performance Ratios R A T IO S 111/1986 111/1985 111/1984 80.24% 58.46 77.37% 60.44 77.82% 61.43 1.47 1.36 1.44 1.20 1.36 1.08 3.71 4.77 3.90 4.93 4.45 4.61 0.46 0.58 0.49 0.54 0.30 0.36 L o a n s t o D e p o s it s Large Banks4 Small Banks5 L o a n L o s s R e s e rv e s to T o ta l L o a n s Large Banks Small Banks D e l in q u e n t L o a n s t o T o t a l L o a n s Large Banks Small Banks N e t L o a n L o s s e s to T o t a l L o a n s Large Banks Small Banks EIGHTH DISTRICT INTEREST RATES6 D ec. 1986 NOWs MMDAs Time CDS 92 — 182 days 1 — 2Vz years 2 1/2 years and over N ov. 1986 O c t. 1 9 8 6 5.07% 5.27 5.09% 5.31 5.12% 5.38 6.02% 6.86 5.63 6.26 6.73 5.59 6.21 6.65 5.59 6.25 6.70 7.31 8.15 8.52 All Eighth District banks with total assets greater than $750 million. Ratios are derived from Call Reports. All Eighth District banks with total assets less than $300 million. Average interest rates paid on new deposits by a sample of Eighth District commercial banks. Year Ago D ec. 1985