How Many U.S. Banks Have Failed Since 2000, And How Will Things Change Going Forward?

According to the FDIC’s list of failed banks, a total of 551 U.S. banks have failed since early 2000. More than 80% of these banks failed in the four-year period between 2009 and 2012, which immediately followed the economic downturn.

* 2016 figures are up to 22nd August

The U.S. banking industry has seen a steady reduction in the total number of commercial banks for well over three decades now, as this figure fell from a peak level of 14,400 in 1984 to 5,210 at the end of Q2 2016. ^[1] This has primarily been due to consolidation in the industry, with banks looking to improve profitability through economies of scale. However, an important factor behind this decline since the economic downturn has been elevated levels of bank failure.

The FDIC reported an average of 4 failed banks each year over the 10-year period 1998-2007, before the recession resulted in the figure jumping to almost 100 a year over 2008-2012. This includes the failure of Washington Mutual at the peak of the economic crisis – the largest in U.S. banking history – which forced the FDIC to step in and broker a deal for the bank’s purchase by JPMorgan Chase (NYSE:JPM). A majority of the banks that went belly up after 2008 were focused on the mortgage industry, and they went bankrupt from losses they incurred when the mortgage bubble burst. Banks that retained their strength through the downturn used the opportunity to acquire distressed banks at bargain rates. U.S. Bancorp (NYSE:USB) stands out in this regard, as it acquired 14 different failed banks from the FDIC over 2008-12 – higher than any other bank in the country.

Steady improvement in economic conditions in the U.S. has helped the banking industry recover considerably over the years – something that is evident from the reduction in number of failed banks each year. However, smaller banks still remain at risk due to the stricter regulatory requirements that have been in place since the downturn. The low interest rate environment has only made things worse for them, as the resulting reduction in revenues has hurt profitability – slowing their path to recovery. This would explain why the number of mergers among commercial banks has been on a steady rise since 2009. ^[2]

While the number of banks categorized by the FDIC as problematic (i.e. banks that are at a risk of failure) has fallen from 884 at the end of 2010 to 165 now, it it still more than twice the historical average level of around 75. Going forward, as the Fed hikes benchmark interest rates and the U.S. economy continues to grow, we expect the level of merger activity to reduce and the number of annual bank failures to revert to around 4 over the coming years.

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1. Commercial Banks in the U.S., Federal Reserve Bank of St.Louis [↩]
2. FDIC Historical Trends, FDIC Website [↩]