Is there an ‘upside’ to bank failures?

You may have missed Monday’s article in the Wall Street Journal about the 279 US banks that have failed since the Great Recession started.

In one paragraph, the article’s authors try to strike an optimistic note by venturing that “the upside of [bank] failures is that they can represent a healthy cleansing of a sector that grew too fast, with bank assets more than doubling to $13.8 trillion in the decade that ended in 2008.”

The article mentions that many of the banks that have failed to date “were opportunistic latecomers” to the real estate bubble of the last few years.

This observation could be read as inferring that the US banking system is better off without these alleged slick quick-buck artists. Each failure of an “opportunistic latecomer” is in fact worth celebrating, if you take this view – call it the “creative destruction” theory of bank failures.

But I don’t think that this is the article’s true intention, since it also acknowledges that many economists see the number of bank failures as “an enduring threat to capital, lending and the economy.”

When we try to measure the economy’s vital signs, let there be no mistake – there’s nothing to cheer every time the Federal Deposit Insurance Corporation (FDIC) has to close down a bank due to its real estate loan portfolio going sour. This is particularly true when the FDIC has to close down a small community bank.

Many Americans, it seems fair to say, take the role of the nation’s community banks for granted.

What do these banks do that is different from larger banks? For starters, a community bank typically reinvests the money deposited with it into the surrounding community, making loans to local small businesses, farms, etc. It doesn’t take the deposits and loan them out in Shanghai or Bonn. It helps stimulate economic growth at home.

You may not find many community banks with offices along Wall Street, but that doesn’t mean they don’t serve an important economic role. Nor does it mean that they have only a small, bit-part to play in restoring health to the national economy.

By talking about how there could be an “upside” to bank failures, I think the Journal was just trying to be provocative and stir up readers.

But it bears repeating – it is no upside to bank failures, especially of smaller banks. 

Bay Area NewsNEP

Just Posted

Dominion Voting Systems, a Denver-based vendor, is under contract to supply voting machines for elections in San Francisco. (Kevin N. Hume/Examiner file)
Is San Francisco’s elections director impeding voting machine progress?

Open source technology could break up existing monopoly

The 49ers take on the Packers in Week 3 of the NFL season, before heading into a tough stretch of divisional opponents. (Courtesy San Francisco 49ers)
‘Good for Ball’ or ‘Bad for Ball’ — A Niners analysis

By Mychael Urban Special to The Examiner What’s the first thing that… Continue reading

Health experts praised Salesforce for keeping its Dreamforce conference at Moscone Center outdoors and on a small scale. (Kevin N. Hume/The Examiner)
Happy birthday, Marc Benioff. Your company did the right thing

Salesforce kept Dreamforce small, which made all kinds of sense

Former San Francisco Mayor Willie Brown, pictured with Rose Pak in 2014, says the late Chinatown activist was “helping to guide the community away from the divisions, politically.”
Willie and Rose: How an alliance for the ages shaped SF

How the Mayor and Chinatown activist shaped San Francisco, then and now

The Grove in Golden Gate Park is maintained largely by those who remember San Francisco’s 20,000 AIDS victims.<ins> (Open Eye Pictures/New York Times)</ins>
Looking at COVID through the SF prism of AIDS

AIDS took 40 years to claim 700,000 lives. COVID surpassed that number in 21 months

Most Read