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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


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102