Lessons to Be Learned from the 120 Bank Failures in 1985

By Sexton, James L. | American Banker, January 10, 1986 | Go to article overview

Lessons to Be Learned from the 120 Bank Failures in 1985


Sexton, James L., American Banker


IT IS WELL TO REMEMBER FROM time to time that ther are 13,400 nonproblem banks scattered across the United States. That fact is proof of the excellent underlying strength of the banking system. But as we begin 1986, we also look back at 120 bank failures in 1985, a record that warrants attention.

The question has been asked for as long as we have had banks, but particularly this year, "Why do banks fail?" Various perspectives yield different answers. "Deregulation," some say. "The economy," many opine. "It's the market working," others say expansively and with confidence. A veteran at the Federal Deposit Insurance Corp.'s division of liquidation, up to his ears in the economic pollution acquired from failed banks, probably would tell us that the problem is not that subtle, esoteric, or sophisticated -- it is just plain sorry loans.

Clearly, deregulation has brought certain pressures upon the banking profession. It has changes the way bankers think about the use of bricks and mortar. It has caused searching analysis of operating expenses. It has prompted banks to think twice about the services they have essentially given away over the years. And it has laid bare, at long last, the utter fallacy in the notion that deposit growth is a goal of any consequence. But no, there is no reason that deregulation should cause failures --not alone. A catalyst alone is inert; it takes inept management to turn deregulation into a destructive force.

The economy receives fairly prominent billing in the overall issue of bank failures. Looking at the distribution of failures, one must concede the existence of a causal relationship. Earlier, the energy-producing states, and more recently the farm belt, have been sites of unusual numbers of failures, as well as problems.

Of course, the dynamics of economic problems and banking is no more complicated than third-grade math: If an area is experiencing economic problems, to whatever extent that problem cannot be absorbed by the borrowers directly affected, it ends up in the system of financial intermediaries. In that instance, the bank that diversifies as much as possible, sticks to its lending standards, and knows when to say "no" or "enough," will limit its damage relative to that incurred by its lesser-equipped counterparts.

Abrupt Changes in the Economy

The domestic and international economic events of the past half-decade have featured a great deal of sometimes abrupt change. It is not the nature of banks to accommodate change very gracefully unless it is gradual. As a result, there is a fairly noticeable rise in the amount of economic clutter in the system, and relatively few banks have totally escaped the aggregate consequences of disinflation, the overpriced dollar, the astounding and unexpected drop in the price of a barrel of oil, and other such events. It is, accordingly, less than astounding that there are 1,100 problem banks in this nation.

Once again, management invariably is a factor, but it would be inappropriate to make that statement without adding that the matrix of economic conditions/management culpability varies materially from one economic cell to another. Stated another way, with diversification, careful credit selection, maturity matching, and close borrower supervision, a clean bank can be operated anywhere in this country, and there are plenty of cases to offer as proof; but it is much more difficult in some geographic areas than others. In instances where the ravages of the predator have cut more deeply than could reasonably have been expected, and in areas where real diversification is not a paractical option, such as in the farm belt, the task of operating a clean bank is comparatively difficult.

The thought that all that is happening is simply the workings of "the market" is particularly intriguing. If, indeed, we are simply witnessing the weak and the inefficient being driven out by the stern and unerring discipline of the marketplace, what self-respecting capitalist would dare to interfere? …

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
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 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 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.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Lessons to Be Learned from the 120 Bank Failures in 1985
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
Items saved from this article
  • Highlights & Notes
  • Citations
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.”

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 8, MLA 7, 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." (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.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    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.