Happy New Year! I and my team at DepositAccounts.com wish you and your family a happy, healthy and prosperous New Year. 2016 should be a year of rising deposit rates. As we keep a look-out for the first bank and credit union rate hikes of 2016, I’ll first start off with my review of last year’s bank and credit union failures. Thanks to the efforts of our analyst Rodney who helped compile the data and create the charts for this review.
As expected, 2015 continued the downward trend in bank closures that emerged over the previous four years. The number of 2014 bank failures (18) was more than twice the total number of closures in 2015, which has come to an end with only eight. The year 2015 stretches the trend to five consecutive years of decline in bank closures. The final closures of the year notably occurred on October 2, leaving an almost completely closure-free final three months of the year.
The chart below shows the number of bank closures per year since 2005 and illustrates the downward trend over the last five years:
Fewer Large Bank Failures
A second trend we previously noted that began in 2010 is that most of the bank failures were little-known community banks as fewer and fewer large banks are failing. In 2014 there were no banks that failed with assets of at least $1 billion, and the largest bank that failed had total assets at the time of closure of $954 million. In 2015, that trend continued, save one anomalous institution–Doral Bank– with $5.9 billion in assets at time of closure. Other than Doral, only two banks closed with assets of more than $100 million dollars ($294.2 million and $272.3 million), three of the eight had less than $50 million in assets, and the smallest had assets of $4.9 million. The following chart shows the assets of the eight banks at time of closing:
The small size of the 2015 bank failures helped keep down the cost to the FDIC Deposit Insurance Fund (DIF). The FDIC reported a DIF balance of $70.1 billion at the end of Q3 in 2015. This is up considerably from the previous year when the DIF balance was $54.3 billion. The FDIC reported a DIF balance of negative $7.4 billion at the end of 2010. At the end of 2008 when it was clear that many banks had to be closed, the FDIC increased the premiums it charged banks for deposit insurance. With the number and size of failed banks going down, this should lead to lower premiums which will make it a little easier for banks to offer higher deposit rates.
States with the Most Failures
Similar to last year, Illinois sits atop the list of bank failures by state with two closures. With three fewer than 2014, the state shares the lead with Georgia, which also has two. Colorado, Washington, Florida, and Puerto Rico each have one failure. Illinois, Georgia, and Florida have seen a large number of failures since the start of the financial crisis in 2008, with 90, 72, and 63 failures, respectively. Below is a graph showing the number of banks that failed in each state during 2015:
All Failed Banks Were Acquired by Other Banks
For the previous years since the financial crisis, the FDIC has been able to find buyers for the vast majority of banks that failed. In those cases, the acquiring banks assumed all regular deposits including amounts over the FDIC limit. So for most people who had deposits over the FDIC limit at these failed banks, they were lucky. No uninsured deposits were lost. The only exception was brokered deposits. It was common that the acquiring banks did not assume some brokered deposits. The banks probably didn't see any benefit from assuming these types of deposits since there are no relationships with the depositors.
All eight of the banks that failed in 2015 were acquired by other banks. That was good news for depositors since that means no bank depositor lost any money in 2015 due to a bank failure. 2013 was the last year that a failed bank wasn’t acquired.
The Loss of High CD Rates When Your Bank Fails
The main issue for depositors when banks fail is the loss of the high interest rate on their existing CDs. By law the acquiring banks are allowed to lower the interest rates on existing CDs. The acquiring banks in 2015 did make use of this allowance. The depositors were free to close the CDs without a penalty, but in this rate environment, it can be very difficult to replace CDs with new ones with comparable rates.
Most of the acquiring banks didn't publicly announced their policy on the existing CDs from the failed banks. For most of the bank failures in 2015, the FDIC just provided the following about interest rates:
Interest on deposits accrued through close of business the day the bank was closed will be paid at your same rate. Current rates will be reviewed by the new bank and may be lowered; however, you may withdraw funds from any transferred account without early withdrawal penalty until you enter into a new deposit agreement.
Credit Union Liquidations
There were 11 credit union liquidations in 2015, a similar number to previous years. 2014 saw 12 failures, while there were 14 in 2013 and 15 in 2012.
The last credit union liquidation occurred just a few days ago on December 29th. Like most of the failed credit unions this year, it was tiny with assets of only $3.2 million. It wasn’t the smallest, however. Three credit unions that failed this year had assets under $1 million. Six had assets between $1 million and $10 million. Only two had assets over $10 million. Those two were Bethex Federal Credit Union of Bronx, NY ($12.2 million of assets) and TLC Federal Credit Union of Tillamook, OR ($109 million of assets).
For six of the credit unions that failed, the NCUA arranged for another credit union to assume all of the shares (deposits) of the failed credit union. This prevented members from losing any of their uninsured deposits. Unlike the case for the FDIC, there were several cases in 2015 when the NCUA did not arrange for another credit union to take over the failed credit union. In these cases, uninsured deposits could have been lost. The one common thread among all of the non-acquisition cases in 2015 was small size. Out of the eleven liquidated credit unions, five credit unions were not acquired. Three of these had assets under $1 million. The other two had assets of $1.9 million and $3 million. It’s never a good idea to go above the NCUA coverage limits, but it’s even a worse idea to go above the limit at a small credit union.
What To Expect for 2016?
We are slowly returning to the years when bank failures were rare. The year 2016 probably won’t be like 2006 when no banks failed, but it may be like 2007 when only three banks failed. However, there are still many problem banks. In the FDIC's Q3 report, the number of "problem" banks was 203 (down from 329 in Q3 of 2014). The FDIC doesn't disclose the banks on this list or the specific criteria it uses to place banks on this list. We can make educated guesses about which banks may be on this list. The blog Calculated Risk maintains an unofficial problem bank list that’s based on publicly available enforcement actions that regulators have released or that have been reported by banks' SEC filings. The number of banks on this list has declined from 401 in late 2014 to 255 in late 2015.
In our bank health ratings page, we have a list of the banks with the worst Texas Ratios. The Texas Ratio is an industry standard for calculating the health of a bank, but is not the only factor to consider. Our data is based on Q3 2015 financial data from the FDIC. A Texas Ratio over 100% is considered at risk.
References to Help Keep Your Deposits Safe:
- FDIC deposit insurance summary
- NCUA deposit insurance summary for credit unions
- Review of private deposit insurance for credit unions
- Verifying Your Internet Bank Deposits are FDIC Insured
- Maximize Your FDIC Coverage with Beneficiaries
- Extending Coverage with Private Deposit Insurance
- Review of 2014 Bank Failures