Can This Be True? No Bank Failures?

You’d think it was no big deal: For the past two years, there have been no bank failures. But it is a big deal. Since the Bank of Ephraim (Utah) went under in June 2004, not a single one of the nation’s 7,508 federally insured banks has failed. Not since the FDIC was established in 1933 had there been a year without a bank failure, and now we have had a two-year period without a blemish on the record.

Does that sound like the free market to you, an industry of thousands of businesses, not one of which took a dive and couldn’t get off the canvas? What’s really remarkable is that one would expect, in a profitable industry, to have a flood of start-ups flaming out in a blaze of bad loans and other foolish uses of initial capital. In the old days, one might have said this is a great example of an overregulated industry, protecting fat and happy banks from new competitors. Yet starting a new bank today is, in itself, no big deal: Though the pace of new charters has slowed slightly, in the last three years some 264 new banks have opened their doors.

So, why is this? Why does our industry seem to be working so wellu00e2u20ac”arguably better than just about any business segment in the country? We’ll credit…

That old rising tide. Or, in the memorable words of James Carville, “It’s the economy, stupid.” O.K., granted, it would be a little disingenuous for bankers to pat themselves on the back without admitting it’s been a pretty nice environment out thereu00e2u20ac”2005 was the fifth straight year of record bank profits, nearly 10% ahead of the previous year. But still…

The regulatory system actually works. Bank regulation, spearheaded by the once-revolutionary FDIC insurance, has made it possible for this country to support not only thousands of community banks, but to have competitive Global Top Ten’s as well. And when the S&L crisis hit, the 1989 legislationu00e2u20ac”the much-despised FIRREAu00e2u20ac”was pretty much what the doctor ordered. Some would argue this is a gross simplificationu00e2u20ac”a little like crediting Homeland Security with the lack of terrorist attacksu00e2u20ac”but the regulatory system really does seem to be working pretty well.

A for-the-most-part graceful entrance to the information age. New information technologies have had a huge impact on giving bankers a better handle on credit quality, monitoring of loans, and gauging the profitability of products and services. Managing the bank isn’t any easier, but the financial technology available is a quantum leap forward from what bankers worked with 20 years ago.

The durability of the branch bank. Seems like yesterday when bricks and mortar was on its way out as a strategy, swept aside in a tidal wave of ATMs and telephone bill-paying and Internet banking. Didn’t work out that way. Customers want a local touch, a place to go, a teller to hand back the receipt now and then, even as they demand the services and products that technology and the Internet have ushered in. As a result, community banks have benefited from the very local character that was supposed to do them in, and the big retail banks that have prospered have done so by creating large branch networks that enable them to compete with the localsu00e2u20ac”ironically, not the other way around.

Rugged-in-the-trenches American competitiveness. Who knew, when bankers started to worry about disappearing spread income, that banks could become this good at developing new sources of fee revenue? Who’d have predicted that banks would be able to securitize loans as effectively as the larger banks have done, selling them, syndicating them, and constantly developing new ways to manage the balance sheet and mitigate risk? Or that boring old mortgage lending would be turned into an earnings engine for so many banks that a few years ago weren’t even in the business? Who’d have guessed that instead of shrinking the landscape, banks in 2006 would be providing Americans with over 90,000 separate offices, up more than 2,200 in the last year alone, in which to handle their banking?

Anyone who has read this magazine over the past 16 years knows that we’ve rarely been cheerleaders for the industry, that we’ve often been no fan of banking reform, and that we’re sometimes critical of individual banks. With every banker we know fingering the worry beads about inflation, a flattening yield curve, and next quarter’s earnings, it seemed a good time to look on the bright side of the recent past. It’s been quite a run.