Saturday, November 22, 2008

a chain of bank failures with few links

Yesterday the FDIC announced one of the banks in the town I grew up in, PFF Bank & Trust (formerly Pomona First Federal S&L), went bankrupt. The FDIC just arranged for a Minnesota bank to take it over. Most customers will not know the difference (source).

There have been a lot of comparisons between our current crisis and the Great Depression. PPF was only the 22nd bank to fail this year. There were more failures during the 1930's -- even after the worst of the bank runs in 1933.

There were far, far more bank failures during the S&L crisis of the late 1980's and early 1990's. You can see this by checking out following graph showing the number of bank failures since the creation of the FDIC in 1934.

Click image to enlarge in a new window.

To put this in perspective, there have only been 22 bank failures this year out of over 8,400 FDIC-insured banks.

A big difference today is that banks are much larger so a single bank going under may have a bigger impact. The graph below shows bank failures in terms of deposits (blue) and assets (red):

Click image to enlarge in a new window.

Now this makes the current crisis look much worse than it really is for two reasons. First the dollar amounts are not adjusted for inflation.

Second and more importantly, over three-fourths of the dollars in the current year are just from one bank, Washington Mutual (WaMu). The FDIC arranged WaMu to be purchased by JPMorgan Chase Bank at no cost to the insurance fund or taxpayers.

Take out WaMu and 2008 looks not so bad.

There will be more failures coming up but the number and relative dollar amounts should much lower (excluding WaMu) than during the S&L crisis of twenty years ago.

Don't buy into the fear-mongering. We've seen and survived worse. Not to say there aren't bad things coming, but banks are the least of our economic worries.

Be blessed!

Source: Calculated Risk: Graphs: FDIC Bank Failures

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