The Geographic Distribution and Characteristics of U.S. Bank Failures, 2007-2010: Do Bank Failures Still Reflect Local Economic Conditions?

Article excerpt

The financial crisis and recession that began in 2007 brought a sharp increase in the number of bank failures in the United States. This article investigates characteristics of banks that failed and regional patterns in bank failure rates during 2007-10. The article compares the recent experience with that of 1987-92, when the United States last experienced a high number of bank failures. As during the 1987-92 and prior episodes, bank failures during 2007-10 were concentrated in regions of the country that experienced the most serious distress in real estate markets and the largest declines in economic activity. Although most legal restrictions on branch banking were eliminated in the 1990s, the authors find that many banks continue to operate in a small number of markets and are vulnerable to localized economic shocks. (JEL E32, G21, G28, R11)


The financial crisis and recession that began in 2007 brought a sharp increase in the number of failures of banks and other financial firms in the United States. The failures and near-failures of very large financial firms, such as Bear Stearns, Lehman Brothers, and American International Group (AIG), grabbed the headlines. However, 206 federally insured banks (commercial banks, savings banks, and savings and loan associations, hereafter "banks")--or 2.4 percent of all banks in operation on December 31, 2006--failed between January 1, 2007, and March 31, 2010. (1) Failed banks held $373 billion of deposits (6.5 percent of total U.S. bank deposits) as of June 30, 2006; Washington Mutual Bank alone accounted for $211 billion of deposits in failed banks.

The recent spike in bank failures followed a period of relative tranquility in the U.S. banking industry. Between 1995 and 2007, on average fewer than four banks failed per year. Bank failures were much more common in the 1980s and early 1990s, however, including more than 100 commercial bank failures each year from 1987 to 1992. As percentages of the total number of U.S. banks and volume of bank deposits, the failures of 2007-10 approach the failures of the 1980s and early 1990s (Figures 1 and 2). (2)

The bank failures of the 1980s and early 1990s were concentrated in regions of the country that experienced unusual economic distress. More than half of all bank failures occurred in Texas alone. Texas and other energy-producing states experienced high numbers of bank failures following a sharp drop in energy prices and household incomes in the mid-1980s. Later, in the early 1990s, New England states had numerous bank failures when state incomes and real estate prices declined. Analysts argued that the concentration of bank failures in regions experiencing high levels of economic distress reflected the geographically fragmented structure of the U.S. banking system in which banks were not permitted to operate branches in more than one state (e.g., Calomiris, 1992; Horvitz, 1992; Federal Deposit Insurance Corporation [FDIC], 1997). Bank failures were especially numerous in Texas and other states that had long restricted branch banking within their borders. Many states eased intrastate branching restrictions during the 1980s, and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 subsequently removed federal restrictions on interstate branching. (3) Proponents of deregulation argued that the removal of branching restrictions would encourage banks to diversify geographically, which would lessen the impact of local economic shocks on bank performance.


This article examines the characteristics of bank failures during 2007-10 and investigates whether the geographic distribution of failures reflected differences in local economic conditions. The removal of restrictions on branch banking, both within and across state lines, has been followed by substantial consolidation of the U.S. banking industry. Bank failures and mergers have reduced the number of U. …