When Banks Fail
According to the FDIC and other sources, the number of bank failures now exceeds 100. The latest closures included four small- and medium-sized banks in Florida and Georgia: Partners Bank and Hillcrest Bank, both of Naples, FL; Flagship National Bank, Bradenton, FL; and American United Bank, Lawrenceville, GA. When banks fail, the federal government, in the form of the FDIC, steps in to protect the consumer. They do this usually on a Friday afternoon, seizing bank assets to pay for outstanding liabilities. The chief of these are the customers’ deposits. Whatever the assets can’t cover, FDIC insurance does.
When Trouble isn’t Trouble
The highest number of banks ever seized in one year was 120 in 1992. There are currently 416 banks “flagged” by the FDIC as being in trouble as of June 2009. This is up sharply from 305 on the list in March of this year. However, the pace of bank closings is actually slowing down. The FDIC seized 24 banks in July, 11 in September, and eight in October, which has only one week left as of this writing. This seems contradictory on the surface. The number of banks in trouble is going up, but the pace of closings is slowing. How can this be?
It’s All Relative
This is an excellent example and proof that money is really just a concept and not a concrete noun. Most of us think of money as the crisp dollar bills that we get in our paychecks and then put in the bank. But money is really a much more fluid and relative concept. To illustrate, look at the criteria for bank closings. You would think that there is an accounting formula or other federal regulation that determines what constitutes “trouble” in the banking industry. After all, the banking industry is one of the most regulated industries in existence. However, the banks that were recently closed are no more or less in trouble than the other 400 or so banks on the list. Further, if we were not in a serious recession, normal criteria would place the number of banks in “trouble” in the thousands. The definition of trouble changes with the times. What is trouble in normal times becomes acceptable in tough times. So if concrete numbers aren’t determining who survives and who closes, what is making the determination?
Just Act Like We’re All Okay
The key determining factor, according to the FDIC, is consumer confidence in the banking industry. In other words, how the American people think and feel about banks determines whether or not they stay open. Remember at the beginning of this article the number one concern when a bank was seized was protecting consumer deposits. That is true, but not for the reason that most of us would have assumed. Deposits are not protected for the actual dollars in the accounts, but for how secure the owners of the accounts feel about the industry as a whole and how likely they are to re-deposit their funds in another bank. The force keeping the banking industry afloat is not money, but the relative and fluid concept of confidence. How deep does that confidence need to be? Who really knows? Maybe, that is why the FDIC won’t say how deep their insurance reserves are.