If they continue at their current pace, bank failures will be down significantly in 2012. That's not just good news for bankers. A more stable banking environment has several benefits for consumers, which may eventually include better interest rates on deposits.
First half bank closuresThe Federal Deposit Insurance Corporation (FDIC) reported 30 bank closures in the first half of 2012. While that might sound like a large number bank closures, it's less alarming considering there are more than 7,000 FDIC-insured institutions in the nation. The 2012 closure rate is also encouraging when trends from recent years are considered. Bank closures peaked at 157 in 2010. Last year they were down to 92, and this year they are on pace for 60. Historically speaking, 60 is not a low number, however. In 2007, there were three bank failures, and there were none the year before. Still, considering where the industry has been in recent years, even 60 would be a step in the right direction.
Four benefits to consumersOf course, bank deposits in the United States are insured by the FDIC, up to $250,000 per depositor per bank. With this backstop behind them, does it really matter to consumers that fewer banks are failing? It does. Here are four specific benefits to consumers from the slowdown in bank failures:
- The preservation of insurance. FDIC insurance funds do not come out of a bottomless well. They are funded by banks, but it is possible for a rash of closures to overload that system. It's a good sign that the system was able to withstand 2008 and 2009, but it is an even better system that the insurance system is starting to get a little bit of a break.
- More stability. Even though customers can rest assured that their deposits are insured, changing banks can be a chore, and nobody wants to do it under duress. Fewer failures mean more customers are able to keep the banking relationships they want.
- More choice. Consumers looking for a high interest savings account or free checking have better odds of success when they have more choices available to them. Because bank failures were often geographically concentrated, some customers saw their choices significantly reduced by those failures. When more banks survive, customers retain more choices.
- A foundation for better interest rates. Interest rates on deposits have been driven down near zero, in part because low profits have given banks little incentive to attract new deposits. It will be a slow process, but improved profitability lays a foundation for better interest rates on CDs, money market accounts and savings accounts. The reduced number of bank failures is a sign that profit conditions are getting better for banks.