WASHINGTON — As unemployment surged and businesses collapsed nationwide in the early months of the COVID-19 crisis, some analysts predicted that the economic ravaging would result in
But so far, the opposite has happened. In a surprising turn of events, the industry has enjoyed one of the longest failure-free streaks in recent memory.
No federally insured bank has been shuttered since October 2020, and a grand total of three have failed since the pandemic officially commenced in March of last year.
Observers point to several reasons for the scarcity of failures. Unlike the 2008 financial crisis, banks were not directly tied to the public health emergency, and the massive amount of government stimulus cushioned the impact. Banks also headed into the pandemic with record-high capital levels and credit risk under control.
"There were moments of 2020 where things were touch-and-go, and all the banks were putting aside huge loan-loss reserves," said Steven Kelly, a research associate at the Yale Program on Financial Stability. "But it just never was that feeling of 2008. There was never that feeling of, we might lose a bank, and part of that was the nature of the crisis."
To be sure, bank failures typically lag economic trends, and some experts say it is hard to predict what will happen after government stimulus programs expire.
But failures have continued to dwindle in the last several years. The four failures in all of 2020 was identical to the 2019 total, and there were zero in 2018. The last year that failures totaled more than 10 was 2014, when 18 institutions were closed. By comparison, nearly 300 banks failed in 2009 and 2010 combined.
“We are in a position where we really have not had bank failures,” Federal Deposit Insurance Corp. Chair Jelena McWilliams said last week during a press conference. “It's been surprising, given the up and down of the economy over the last year and a half.”
The spring of 2020 saw a historically severe downturn, with double-digit unemployment almost overnight and towering market uncertainty. The
But the economy has since recovered, with unemployment hovering around 4%, thanks largely to the trillions of dollars of emergency stimulus. Regulators have also eased certain rules for banks while loan forbearance programs instituted by the executive and legislative branches cushioned the blow on consumers.
“When the economy is doing well — unless you're incompetent, or you make some really risky bets — a bank shouldn’t fail,” said Tom Vartanian, executive director of the Financial Technology & Cybersecurity Center and the author of the book "200 Years of American Financial Panics."
But some policymakers say that the unique nature of the mid-pandemic economy makes it difficult to gauge the ultimate impact of COVID-19 on bank failure trends.
“This is not an absence of bank failures in what I would call normal circumstances,” Diane Ellis, director of insurance and research at the FDIC, said at the agency's press conference. “The banking industry has been supported quite a bit by fiscal stimulus, by monetary policy and so forth.”
“As we return to something more normal — normal economic performance, a more normal environment in total — we'll see what happens at that point,” Ellis said.
An article
“Unprecedented policy support, coupled with loan modifications, provided a bridge to many borrowers as economic activity stalled and then restarted,” the authors wrote. “As the pandemic wanes and policy support, including the window for Section 4013 loan modifications, ends, a key question remains: was the pandemic's impact on credit and, in turn, bank health averted or merely delayed?”
FDIC data shows that the downward trend in failures has been several years in the making. As recently as 2012, 51 banks failed. That number was more than halved in 2013 to 24. Since 2000, the average time between bank failures is roughly 14 days. But since 2018, that average has stretched to more than 160 days.
Some analysts argue that a prolonged absence of bank failures can actually be a bad omen. Aaron Klein, a senior fellow at the Brookings Institution, pointed out in a 2018 blog post that the longest period the U.S. has ever gone without a bank failure was between 2004 and 2007, right before the 2008 financial crisis.
While today’s economy is dramatically different than those years, Klein maintains that long stretches without bank failures can indicate hidden pockets of financial risk or, conversely, a broader unwillingness for banks to take sufficient risks.
“If anything, the weirdness in the last few years reinforces that we're not nearly as good at predicting risks as we thought we were,” Klein said.
Unseen risks aren’t the only danger that a lack of failures could portend. If anything, Klein says, the opposite scenario could also be true — that in the years leading up to the pandemic, many banks may have been unwilling to take sufficient risks, limiting their profitability and ability to compete with their peers.
"Could it be that banks had not allocated enough credit going into the recession, weathering it better than one might have expected but having had slower growth leading in?" Klein asked. "It may have been the problem was that pre-COVID, there wasn't enough lending."
In either case, analysts say that supervisors should consider taking a second look at the models and assumptions they rely on to gauge risk on banks’ balance sheets during financial peacetime.
“From a regulatory perspective, the time to take a look at the roof is when the sun is shining,” said V. Gerard Comizio, an associate director of the Washington College of Law at American University. “This is a good time to take a step back and look at what other risk factors are out there.”
It remains possible, analysts say, that the paucity of bank failures is nothing but another indicator of how strong the country’s economic recovery from the pandemic has been so far. Policymakers may not know for sure until the current boom ends.
"You'll find out how much risk people took in this environment when the environment shifts to something that's more distressed," Vartanian said. "When the tide goes out, you see who's swimming naked."
