US Banks Stabilize While Europe's Shows Signs Of Strain

As is so often the case, the good news didn't make the headlines.

While banking news in recent weeks was dominated by troubling news from Cyprus, the U.S. banking system quietly finished the first quarter of 2013 on track to having its most stable year since before the 2008 financial crisis.

That financial crisis taught many bank customers not to take anything for granted, and the troubles in Cyprus are the latest reminder of that lesson. Still, for the time being at least, U.S. bank customers can take some comfort in the steady improvement of this country's banking system, while Europe's has not yet contained the contagion that has spread financial trouble from one country to another.

U.S. banks show vast improvement

The FDIC reported that only four U.S. banks failed in the first quarter of 2013. With more than 7,000 FDIC-insured banks on the books, some occasional failures are inevitable, but the first quarter's pace would put banks on track for just 16 failures in 2013, which would be the lowest amount of failures since 2007.

To put this in perspective, bank failures peaked at 157 in 2010, and 51 banks failed last year. Against that backdrop, the slow pace of failures this year represents a real return to stability for the U.S. banking system.

More trouble for Europe

Europe's banking situation is anything but stable, and the latest trouble comes from the island of Cyprus.

Cyprus is a small member of the European Union, but it has a disproportionately large banking system. That's because it has been an off-shore haven for foreign depositors, especially wealthy Russians who aren't entirely comfortable with keeping all their riches within their home banking system. Part of what attracted so many depositors was the high interest rates offered by Cypriot banks -- and that's the source of some of the trouble.

Cyprus, which has strong cultural ties to Greece, funded those high interest rates in part by investing in high-yielding Greek bonds. When Greece defaulted on some of those debt obligations, Cypriot banks were caught short. The European Central Bank then worked with the government of Cyprus to come up with a deal to try to recapitalize that country's banks. The arrangement they settled on left insured deposits -- those of up to 100,000 euros -- intact, but will take some of the cost of recapitalization out of the value of larger, uninsured deposits.

This solution doesn't exactly clear up the mess. Losses by large depositors may yet trigger runs on banks in other shaky European countries, if depositors there fear the same treatment. Smaller depositors did not get off completely unscathed either, as tight withdrawal restrictions limited access to their money. In short, it's not a solution that has inspired confidence in Europe's banks.

U.S. savings accounts have been spared the kind of turmoil some Europeans have seen, though everyone in the global financial system could rest easier if Europe could contain its problems.