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.
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:
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.”
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.”
Get notified when new content is available on our On the Economy blog.
The St. Louis Fed On the Economy blog features relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts.
Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.