2023, The Year Of Few But Colossal Bank Failures

Iowa's Citizens Bank of Sac City declared bankruptcy last Friday, after some bad loans made to the trucking industry inflicted heavy losses on its balance sheet. At $66 million, it was a tiny bank, and its demise will send barely a ripple through the financial sector. However, this was the fifth bank failure this year. Is there a problem here, or not?

A Story Of Two Parts

In terms of bank failures, there are two stories for 2023. The first is that hardly any banks failed—in fact, far fewer than in recent years. The second is that those that did fail, failed big. The Sac City bank was a minnow. Others were whales.

Banks Failing, By the Numbers

So far this year, five US banks have failed. While that doesn't sound great, the number actually isn't that high.

The FDIC tracks bank failures since 2001 on a page of its website. Five is certainly more than we've seen for the past few years, but it's far, far fewer than it was a decade ago. The last time the number was this high was 2017, when there were 8 failures. In 2016, there were 5.

But those are low figures in the context of the financial crisis. In 2008, 25 banks went bankrupt. The next year, it was 140, and in 2010, an incredible 157 banks failed. The number then started to fall, to 92 in 2011, 51 in 2021, and 24 in 2013.

Looking further back, the number of failures in 2023 isn't so very different to what it was in the first few years of the 21st century. However, focusing purely on the number of banks overlooks something more important: The size of the banks, and therefore the impact on the Fed's balance sheet.

2023's Record Losses

As you might expect, the total assets affected during these failures broadly reflects the number of banks. But that picture changes in 2023.

Although only five banks have collapsed this year, they account for an incredible half a trillion dollars in assets. Moreover, we can pretty much ignore the Sac City bank, at $66 million, and Heartland Tri-State Bank in Elkhart, Kansas, at $139 million. The three other banks are another matter.

In March, Signature Bank and Silicon Valley Bank (SVB) failed, with $110 and $209 billion in assets respectively. Then in May, First Republic Bank failed, with $229 billion in assets. These three pushed the total losses up far beyond even the worst period of the Global Financial Crisis.

TL;DR hardly any major banks have failed this year—only three, in fact. But those three were huge failures.

What's more, the reasons for their failures was different. During the GFC, banks failed because they made risky bets on opaque mortgage derivatives. These banks failed because they were underwater on what is supposedly the safest asset out there, long-duration US government bonds. Rising interest rates drove down the price of the bonds in their portfolios, and when customers withdrew too much money, those losses were crystallized and the banks collapsed.

So... What?

The reality is that a lot of banks are insolvent for the same reason. They will be fine so long as they can hold on until the bonds they bought reach maturity. The problem with SVB and others is that the banks didn't have the chance, as runs on their reserves meant they were forced to sell to cover withdrawals. The losses then went onto the Fed's balance sheet.

As long as the same thing doesn't happen again, there should not be an issue. The fact that it has happened already cautions against complacency. These weren't even the largest banks in the US. JP Morgan has almost $4 trillion in assets, and another five banks have over a trillion each.

America has some big banks. They will probably be fine. Probably. But, as we've seen, it only takes one or two to go bust for the losses to stack up fast. So far, the Federal Reserve has made the calculation that a few bankruptcies is worth controlling inflation with higher interest rates. But Jay Powell will be glad to have room to maneuver if more banks are threatened.

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