Number of Bank Failures Finally Starting to Decline?

When the FDIC released its Quarterly Banking Profile for the fourth quarter 2010, it included a statement from FDIC Chairman Sheila Bair that the agency believes "the number of failures peaked in 2010." However, at least through the end of February 2011, the evidence was to the contrary, as the number of bank failures during the first two months of 2011 (23), exceed the number through the end of February 2010 (22).

However, since the end of February 2011, the number of bank failures has declined sharply. The FDIC closed only three banks during March 2011, and only one since March 11, 2011. As of April 1, 2011, there have been a total of 26 bank failures this year. By the same point in 2010, there had been a total of 41 failed banks.

The difference between the two year-to-date tallies is that during March 2010, the FDIC took control of 19 banks, compared to only three in March 2011. In addition, the first Friday in April 2011 also passed without any additional bank failures.

The 26 bank failures through the end of March would if annualized project to about 104 bank failures by year end 2001, which would be the lowest annual number of bank failures since 2008 (when there were 25). But if the bank failure pace that prevailed in March 2011 were to continue, the number of bank failures by year end could be well below that projected number.

One of the signs that will be interesting to watch is the number of problem institutions reported when the FDIC releases its next Quarterly Banking Profile for the quarter ended March 31, 2011. The Profile is due to be issued sometime later in May. The number of problem institutions has been increasing every quarter for several years now, although the rate of increase has slowed. In its last profile, the FDIC stated that 2010 was a "turnaround" year for the banking industry. If last year truly was a turnaround year, the reported number of problem institutions should finally start to decline -- which, if it were to happen, would tend to support the probability that the slower rate of bank failures could well continue as the year progresses.

With the 23 bank failures so far this year, the total number of bank failures since January 1, 2008 stands at 348. Even with this significant number of failed institutions and the amount of time that has passed since the beginning of the current bank failure wave, the FDIC has so far filed lawsuits against the directors and officers of only six failed banks. (Refer here to access a list of the FDIC lawsuits.)

On its website, the FDIC reports that as of March 15, 2011, it has authorized lawsuits against a total of 158 individuals. However, the six FDIC lawsuits so far collectively include only about  43 individual defendants, which suggest that there are a number of additional lawsuits being readied and likely to be filed in the near future. In addition, the number of individuals against whom lawsuits have been authorized has grown over recent months to its current level of 158, and since banks have continued to fail in the interim, it seems likely that the authorized number will continue to grow, which would imply an even greater number of lawsuits yet to come.

The number of lawsuits that ultimately will be filed remains to be seen. But while that part of the story unfolds, it is noteworthy that for the first time in quite a while, the story appears to be that the number of bank failures is declining. And that sure seems like a good thing to me.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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