Number of U.S. Banks Drop by 77 in First Quarter

by: John M. Mason

The FDIC has released the financial statistics on the banking industry for the first quarter of 2011.

We knew that through May 20, 2011, the FDIC has participated in the closing of 43 banks. Through the end of the first quarter of 2011, 26 banks had been closed.

With the first quarter results now available we can observe the actual shrinkage in the number of banks in the United States.

On March 31, 2011 there were 6,453 banks in the United States, 77 less than existed on December 31, 2010.

There were 6,773 banks in existence a year earlier, March 31, 2010, so the banking system has 320 fewer banks at the end of the first quarter this year than one year ago.

At the start of the recession in December 2009, there were 7,284 banks in the banking system, 831 less independent units than existed at the end of the first quarter of this year.

The largest drop in banks in the first quarter was in the smallest institutions: there were 51 fewer banks with assets of less than $100 million at the end of the quarter than at the end of 2010.

Banks between $100 million in asset size and $1.0 billion in asset size dropped in number by 34 units.

Banks that had more than $1.0 in assets actually rose as the number of banks in this category increased by eight banks.

The consolidation in the banking industry continues. If the number of banks continues to drop by about 80 banks per quarter, this would mean that the decline in the number of banks in the United States in 2011 would be roughly the same as the decline that took place between March 31, 2010, and March 31, 2011.

However, the composition of the decline in the number of banks in existence seems to be changing. Whereas the number of banks that failed in 2010 was about half the decline in the number of banks in existence, in the first quarter of 2011, the number of failed banks was only about one-third of the decline in the total number of banks in existence.

This would seem to be a healthy development. The banking system is still expected to shrink, but maybe we have passed the peak of bank failures and most of the contraction in the future will be in consolidations coming through acquisition and merger.

If the number of banks in the banking system does drop by around 320 this year, that would put the number of banks at about 6,200 on December 31, 2011, a reduction of almost 1,100 banks since the recession began in 2007.

If one of the goals of the Fed’s quantitative easing (QE2) was to provide enough liquidity to the banking system so that the FDIC could close banks with the least disruption possible, then QE2 has seemingly been a success. The goal of the FDIC, of course, is to close banks in an orderly fashion and the excess liquidity in the banking system may be seen as the means that allowed many of these banks to stay open - especially the smaller ones - before either the bank was closed or an acquirer was found.

Obviously, the banking system is not “out-of-the-woods” yet. I believe the behavior of the banks indicates the continued fragility of many banks, especially the smaller ones. The banking system should have started lending now, almost two years into the current economic recovery. Yet the banks continue to “hold on” to the reserves the Fed is pumping into the banking system. Excess reserves are closing in on $1.6 trillion ... with still only modest increases in lending ... and this increase is just coming in the largest 25 banks in the country.

I am still seeing only 4,000 banks or less in the United States banking system in the relatively near future. I believe that the financial condition of domestically chartered banks in the United States, the movement of more foreign banks into the United States banking system, and the changes that are taking place in the use of information technology in the banking system are going to result in a continued decline in the number of banks that exist.

I do believe that this restructuring of the banking system will result in a stronger and more vibrant banking system, one prepared to compete in the 21st century. The transition to this “new” system, however, is slow and tenuous. Tenuous, because creating a “new” banking system, one that is much more technologically advanced will not come about easily, especially given the road blocks the politicians and the regulators will put in the way of the evolving system.