In a year of big financial news, 2018 had a sleeper story that went largely unnoticed...

Rob Hajduch, Principal Credit Analyst

There was no shortage of topics to captivate the collective imagination of the financial press and its audience in 2018, including Brexit, trade wars, elevated capital markets volatility, the Federal Reserve's program of interest rate policy normalization and (naturally) the 10-year anniversary of the precipitous Lehman Brothers bankruptcy filing in September 2008. Somewhat surprisingly, an item of note (and hope) related to the latter two topics went largely unnoticed and unheralded. For the first time since 2006 - and for only the third time in the history of the FDIC - not a single bank in the U.S. system failed. Additionally, on December 6, 2018, the FDIC announced policy changes to streamline the charter application process.

The economic carnage that followed Lehman's collapse extended far beyond the Wall Street epicenter, with the broad banking system suffering failures on a wholesale level not experienced in decades. The FDIC failed 397 institutions from 2009 to 2011, with 2010 representing the nadir when 157 banks were shuttered. As bad as the post-Lehman period was for bank failures (not to minimize the trauma), it was not as terrible as the decade spanning 1982 - 1992, when 2,808 institutions failed. 

What truly distinguishes this most recent failure cycle from every other since the FDIC was created in 1933 is the lack of new de novo ¹ charters granted since 2010, when five new banks were chartered. In the subsequent period ended September 30, 2018, only 13 new charters were granted - and per S&P Global Market Intelligence, between 2009 and 2012 not a single application was even filed. By contrast, the standing record low year for de novo charters granted by the FDIC was 15 in 1942 and it granted 1,456 new charters between 1934 and the end of 1941.

Even as failures have tapered off against a stronger macro-economic picture, attrition has continued to shrink the number of chartered institutions supervised by the FDIC - from 8,012 at the end of 2009 to 5,477 at the end of the third quarter of 2018, for a net loss of 2,535 deposit taking banks in the system. Roughly 20% of the loss of operating banks is accounted for by failures since 2008, with the remainder primarily the result of plain vanilla M&A in an era of tighter regulation, weak economic growth and low interest rates. The FDIC's more constructive posture toward de novo bank creation represents both an attempt at addressing the long drought in charter extension, as well as a reinforcing signal that the 2008 crisis is, in fact, over. It seems it is officially time to turn the page.

Sources

Federal Deposit Insurance Corporation statistics (www.fdic.gov)

S&P Global Market Intelligence, FDIC Signals it is ‘open for business' with revamped de novo process, December 27, 2018.