Bank failures: An important economic barometer that no one is talking about


This past Friday, the Federal Deposit Insurance Corporation (FDIC) shuttered another four US banks. That makes 90 bank failures so far in 2010.

If bank failures continue at the same rate for the rest of 2010, you can expect perhaps 200 in total to fail this year. That would represent a jump over 2009, when the FDIC closed 140 failed banks.  In 2008, just 25 US banks were closed by the FDIC. (To keep the number of failures in perspective, we need to remember that the US has about 8,000 banks in total.)

Tracking the number of bank failures represents another way to count up the casualties of the Great Recession. The FDIC is working through a grim sort of financial triage, separating the banks that have been mortally wounded by the US real estate meltdown from the healthy ones.

If you could use one word to summarize typical media reaction to the bank failures, it would be “indifference.” Beyond local community newspapers or TV stations, and various financial blogs, these individual bank failures do not receive wide attention, especially since they tend to be too small to rank as Wall Street-sized institutions.

You can’t evaluate a local bank’s importance solely by its size, however. Local banks play an important role in local economies, including by providing credit to start-ups created by entrepreneurs living close by.

This fact gives us another perspective on the FDIC’s ongoing triage. Contracting the size of the US domestic banking sector to strengthen its overall stability is painful, even if it is necessary. But to contract that sector to the point that local entrepreneurs find it hard to secure loans to get their businesses off the ground would be far more painful – and, arguably, a major mistake.

Politically, there is little interest so far among either Democrats or Republicans in starting a partisan war-of-words over bank failures. Perhaps by the end of the year, that will change. Maybe Democrats will try to presumptively hang the bank failures on George W. Bush’s economic policies, while Republicans will blame the failures on President Obama.

So if the media and elected officials don’t (yet) feel like saying much about bank failures, who does that leave to speak up about the issue?

One possibility would be for a private sector leader to deliver a major speech (or even better, a series of speeches) arguing that while some triage of the US banking system may be necessary, that triage should be carried out in such a way that preserves as many local banks as possible, and respects their role in fostering local economic growth.

Jeffrey R. Immelt, Chairman and CEO of GE, delivered an excellent speech about the need to renew American industrial greatness last June at the Detroit Economic Club. That speech is a good model for the kind of public statement needed to rouse the politicos and the mainstream media from their apparent apathy towards local bank failures.

Given the quickening pace of FDIC bank closures, this is a speech that cannot come too soon.

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