ByWilliam R. Emmons , Andrew P. Meyer
Although the most banks and thrifts have failed during 2008 since 1994, the number of failed institutions is minuscule compared with the number of failures that occurred during the 1980s and early 1990s. (See Figure 1, and the FDIC’s failed-bank list for the latest failures.) In the peak year of 1989, there were 534 failures, including 206 banks and 328 thrifts. And even those turbulent years pale in significance when compared with the early 1930s, when more than 1,000 banks failed each year between 1930 and 1933. Indeed, the 4,000 banks that were “suspended” during the single year of 1933 exceed the total number of insured banks and thrifts that have failed since then (less than 3,600).
Yet, 2008 is setting an ignominious standard in another way. The total assets of the 14 banks and three thrifts that had failed by Oct. 24 total about $350 billion, more than in any previous year. The bulk of this total is represented by the assets of Washington Mutual’s two thrifts ($307 billion) and IndyMac ($31 billion). These failures, however, are not the first of large banks or thrifts. (See Figure 2.) Adjusting for inflation, the previous peak year for the asset values of bank and thrift failures was in 1989, at $250 billion.
Even more significant are the banks that came very close to failing but were acquired by another bank with government assistance, and the non-depository financial institutions that collapsed or were given special government assistance. Measured by total assets at the parent- or holding-company level at the end of last year, there have been seven major U.S. financial institutions so far that failed, were rescued or were given “open-bank assistance” by the Federal Reserve and/or the Federal Deposit Insurance Corporation (FDIC), or used the Treasury’s Capital Purchase Program to avoid failure. (See table.) In several cases, the total assets measurement seriously understates the scope of their operations and their importance to the financial system. The largest of these institutions was AIG, a global insurance and financial-services company with more than $1 trillion of assets. Six of the seven financial institutions were larger than the largest depository institution ever to fail, Washington Mutual.
If we add the 17 bank and thrift failures during 2008 to these seven major firms that collapsed or were rescued with government assistance, the value of total assets of financial failures (or virtual failures) this year exceeds $5 trillion—which we estimate may be greater than the total assets of all previous financial failures in the history of the United States.
Moreover, these figures do not reflect the full extent of government intervention into the financial system this year. The Federal Reserve and the federal government have expanded direct lending to a wide range of financial firms through the Fed’s discount window and by providing liquidity backstops for money-market mutual funds and commercial-paper markets. In sum, 2008 sets an unfortunate standard for financial failures and government intervention into financial markets—one we all hope will never be repeated or exceeded.
SOURCES: Milton Friedman and Anna Schwartz, A Monetary History of the United States (1963) for 1921-1933, FDIC (2008) for 1934-2008. Note that present-day failures can barely be seen in this chart in comparison to the previous ones.
|Name||Type of institution||Holding-company assets at end of 2007 financial year (billions of dollars)|
|AIG||Insurance company/financial conglomerate||$1,061|
|Fannie Mae||Government-sponsored enterprise||883|
|Wachovia*||Financial holding company/commercial bank||783|
|Freddie Mac||Government-sponsored enterprise||764|
|Lehman Brothers||Securities firm/investment bank||660|
|Bear Stearns||Securities firm/investment bank||395|
|National City**||Financial holding company/commercial bank||150|
SOURCE: Company financial statements.
* Government-assisted takeover by Citigroup was withdrawn in favor of takeover by Wells Fargo.
** Takeover by PNC Corp. was assisted by the Treasury’s Capital Purchase Program.