"Only" 124 U.S. banks failed last year, well down from the 169 banks that folded in 1990.
That's the "good" news that William Taylor, chairman of the Federal Deposit Insurance Corp. (FDIC), brought to Salt Lake City Friday.The bad news, Taylor told a breakfast meeting of the Garn Institute of Finance at the University of Utah, is that the banks that went under last year were much larger than those that closed their doors in 1990. The assets of failed banks in 1991 totaled about $63 billion, four times the amount ($15.7 billion) of a year earlier.
Not surprisingly, said Taylor, whose FDIC guarantees the nation's bank deposits up to $100,000 per depositor, the cost of resolving the failures increased dramatically, giving rise to rumors that FDIC was in serious trouble and would not be able to continue covering such massive failures.
"Bank Insurance Fund losses on the 127 failed and assisted banks last year totaled $8.6 billion," Taylor said, adding that, "in the insurance business, the word `totaled' has an ominous ring."
By way of comparing the scope of recent bank failures, Taylor pointed out that some 1,000 banks have folded in the past five years, an average of 200 per year. Conversely, from 1942 to 1981 only about 24 banks failed, an average of only six per year.
The bank failures of the past five years have cost the FDIC more than $25 billion, said Taylor (and) "even in Washington, that's a lot of money."
The FDIC has, in recent years, also had to become the deposit guarantors of the nation's beleaguered thrift industry, a burden that only added to the cash drain. Last year, 18 savings banks went under, said Taylor, adding another $3.3 billion to FDIC's Bank Insurance Fund losses.
"To put that number in context," he said, "the 18 savings banks that failed in 1991 represented 14 percent of the institutions that failed, but the losses the Bank Insurance Fund experienced for the savings bank failures represented 38 percent of all losses."
Today, he said, the Bank Insurance Fund covers about $190 billion in deposits at savings banks.
Not surprisingly the FDIC ran low on money and had to ask Congress for authority to draw on $70 billion.
People constantly ask Taylor, "What happened?" as they try to sort out the massive collapse of the thrift industry and the many bank failures in its wake. Taylor says there is a simple answer and a complex one. Taylor said he always forgoes the complex answer in favor of the simple one that, though incomplete, makes the most important point:
"Look at the skyline of almost any of the nation's major cities, and compare it to the skyline a decade ago. While the West continued to build, the East was fully rebuilt. Commercial real estate exploded during the 1980s, and banks financed much of it.
"Many of our cities have so much empty real estate that experts say it will take into the next century to fill it. And an empty - or half-filled - office building on the corner does not pay the debt service." The result: Many banks holding those loans failed.