A Breakdown of Bank Failures in 2014

In 2014, 18 banks were closed in the U.S., marking the lowest total since 2007. A recent Banking Insights article from the St. Louis Fed’s Supervisory Policy and Risk Analysis unit examined some of the tendencies of these failed banks.

Michelle Cissi, a policy analyst, noted that regulators cited large loan losses associated with real estate lending and the general dissipation of assets as the main reasons for insufficient capital accounts at failed banks in 2014.

Loans

Some of the nonperforming loan ratios of failed banks were considerably worse than those of their peers. For example, in the fourth quarter of 2013:

• Regarding commercial and industrial loans, 34.8 percent at banks that eventually failed were nonperforming, compared with 1.5 percent at peer banks.
• Regarding commercial real estate loans, 26.5 percent at banks that eventually failed were nonperforming, compared with 2.3 percent at peer banks.

Expenses

Net interest margins for the failed banks were similar to their peers in the same time period, but their noninterest expenses weren’t. Cissi wrote, “These institutions spent a disproportionate amount of money on noninterest expenses such as salaries, employee benefits, buildings and fixed assets, causing their efficiency ratios to deteriorate.”

Conclusion

Cissi concluded, “If the recent trend of declining bank failures continues in 2015, then there will be another small drop-off in failures from the 18 failures observed in 2014, after which bank failures are anticipated to level out to historically low numbers for the next several years. As has been the case for the past several years, we expect that banks that fail in 2015 will exhibit poor credit quality and insufficient capital.”

Additional Resources

• Banking Insights: 2014 Bank Failure Summary
• On the Economy: Beige Book: Economic Activity Expands in Most Fed Districts
• On the Economy: A Look at Household Debt around the Great Recession