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

By Aubuchon, Craig P.; Wheelock, David C. | Federal Reserve Bank of St. Louis Review, September-October 2010 | Go to article overview

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


Aubuchon, Craig P., Wheelock, David C., Federal Reserve Bank of St. Louis Review


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.

[FIGURE 1 OMITTED]

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. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

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

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.