The U.S. financial system is no stranger to bank failures...

Whether it be from a panic-driven run on deposits or one too many bad loans, we've seen banks collapse time and again.

Back in the late 1980s, for instance, we had the savings and loan (S&L) crisis. It wiped out more than $400 billion in assets and nearly a third of all S&L institutions.

Then, there was the Great Recession. Several big banks went under... including Washington Mutual. The bank held about $300 billion in assets when it failed, marking the largest bank collapse in U.S. history.

Over the years, regulators have tried to prevent crises like these from happening again. But even with tighter lending standards and higher reserve requirements, banks still fail...

Just last year, Silicon Valley Bank, First Republic Bank, and Signature Bank collapsed all within the span of a few days. They lost more than $500 billion combined before being bailed out by the government.

Overall, there have been more than 560 bank failures in the U.S. since 2000. By comparison, less than 50 banks have collapsed in Canada since the 1960s. (Canada has a more stable approach to its banking system... but that's also part of why the U.S. economy has grown so much faster.)

Every time U.S. banks fail, there seems to be a new cause.

Today, we'll look at what's likely to be behind the next wave of bank failures... and why it won't be as bad as the past few banking crises.

Banking regulations don't prevent banks from collapsing... 

They just force banks to find another way to make money.

During the Great Recession, a large amount of extremely risky mortgage-backed securities caused banks to collapse.

Last year, banks struggled because they had so much money in U.S. Treasurys... which lost value as interest rates surged.

Today, many regional banks are taking huge losses because they are heavily exposed to the troubled commercial real estate ("CRE") market. That's what nearly took out New York Community Bancorp (NYCB) earlier this year.

And although NYCB narrowly avoided collapse, CRE is still in trouble.

Office buildings are sitting empty. And many CRE operators are starting to send the keys back to their lenders. That means banks like NYCB aren't out of the woods just yet.

Smaller regional banks are going to get hurt by their CRE exposure. And most won't be lucky enough to get bailed out.

While it's nice to think that the U.S. financial system has learned its lesson from past crises... there are bound to be more bank failures from here.

That doesn't mean we're looking at another 2008-style disaster... 

Right now, outsized exposure to CRE is causing small banks to struggle.

When borrowers can't pay their loans on time, these banks are hit hard.

Delinquency rates are at record levels. And banks are setting aside more money for loan-loss provisions... a safety net for when loans go bad.

The good news is that the most exposed banks are smaller, regional banks. The very biggest banks – the ones considered "too big to fail" – should be just fine.

Their loan exposure is much more diverse – and in turn, less risky – so pain in the CRE market isn't likely to topple them.

Plus, it'll probably be some time before banks do start failing...

Today's banking troubles just aren't as bad as they were in the Great Recession or the S&L crisis.

According to data from the Federal Deposit Insurance Corporation ("FDIC"), five banks failed in 2023. That's not great. However, it's not nearly as many as after the 2008 crisis.

Take a look...

Now, the recent bank closures did result in significant asset losses. The five bank failures wiped out about $550 billion.

But that hasn't translated into a huge wave of bank failures like it did during the Great Recession. Plus, the asset losses only make up about 2% of today's U.S. GDP.

So while CRE is likely to be the center of a small wave of bank failures... it's unlikely to cause anything like what we saw during the Great Recession.


Rob Spivey
April 29, 2024