Banking System Healthier Than During Last Crisis

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

As each day seemingly brings a new reason to worry about the economy, Americans are intensifying their focus on the banking system, which in many cases can have the most direct impact on the average person’s pocketbook.

While economic anxiety is well-founded in light of today’s market turmoil, data suggests that widespread concern about bank failures could be overblown, industry officials say. Indeed, the recent spate of bank failures seems remarkable only if one compares it to the unusual period of tranquility that preceded it, a spokesman for the Federal Deposit Insurance Corp., Andrew Gray, said. “If anything, the rate of bank failures is returning to historic norms,” he said.

So far this year, there have been eight bank failures, and although more are likely on the way, the number is trivial in comparison to those that occurred during the last banking crisis, in the late 1980s and early 1990s. In 1988 and 1989, for instance, there were more than 1,000 bank failures — 534 of them in 1989 alone. The reason fewer banks are failing despite being under as much stress as they were during the last banking crisis is that they are much better equipped today to deal with losses, experts say.

“Banks are failing today for the same reason they did 20 or 100 years ago,” a financial consultant at Ely & Co., Bert Ely, said. This time around, though, “the U.S. has a much stronger banking system.”

One change that has bolstered the system is the FDIC’s more proactive stance. Among its methods is to keep a tally of banks that may be in trouble — a closely held secret — and to introduce capital requirements based on a bank’s risk profile to ensure it has significant cash in case of losses.

“What we learned out of the bank failures of the late 1980s and early 1990s is that capital is king,” a financial services attorney who is a partner at Venable LLP, Joseph Lynyak, said. “If you’re going to be a bank, you have to have enough capital to take losses in an economic downturn. These capital requirements have been extraordinarily successful in making banks safer.”

The growth of large banks that operate on a national scale is also helping the industry weather the current economic storm. Twenty years ago, small, local banks accounted for a much larger share of America’s banking industry. These banks are far more vulnerable to losses because they tend to be undercapitalized relative to larger banks, and they often rely on their local economies. For example, a drop in property values in a single neighborhood can be a disaster for a bank that only lends to homeowners in that area.

In the current banking system, large institutions dominate. There are more than 7,000 banks in America, but the largest 107 of them represent 79% of all bank assets in the country, according to a banking analyst at Ladenburg Thalmann & Co., Richard Bove. The five largest banks represent more than 50% of total bank assets.

“If you take the smallest 6,000 banks in America and add up their assets, it’s not equal to the total assets at Citigroup,” Mr. Bove said.

After analyzing FDIC data going back to 1984, Mr. Bove concluded in a recent report that the banking system “is not anywhere near the danger that existed in the late 1980s and early 1990s, despite all the whining by public officials.”


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