The banking sector remains in the headlines, for the wrong reasons. After more than a year of rising interest rates, regional and specialty banks are feeling the pain of a changing environment. Consumers need not look far for stories espousing upcoming recessions and reasons not to trust your bank. As it turns out, bank failures are far more common than most realize.
According to the FDIC, there were 564 bank failures from 2001 through 2023. That equates to an average of 25 per year. Now, averages don’t always tell the full story. The numbers skew heavily toward economic turmoil, with 2009 and 2010 together accounting for half of the 564. In the 22 years reviewed, there were five separate years in which no banks failed. Throw in another handful of years where the tally was below 5, and you start to see the picture. The idea of for-profit banks going out of business is not unheard of. We think of banks as mostly large, faceless institutions, but they are run by people who make decisions that don’t always work out.
As a whole, the banking industry has been consolidating for some time. In the year 2000, the FDIC listed 8,198 commercial banks in the United States. At the end of 2022, that number was down to 4,135. As previously illustrated, we know not all the four thousand or so missing banks went out of business. As the economy grows, banks find themselves wanting to attract more customers. A tried-and-true way of accomplishing this is buying your rival or a smaller bank before they can compete. You could also combine yourself with a bank that specializes in an area that you are new to. If this sounds familiar, this is part of capitalism. Companies have always come into and out of the market, in part due to their tendency to acquire one another.
Bringing us back to the present, JP Morgan has recently won an auction to purchase the assets of the latest bank failure, First Republic. Analysts do not expect the acquisition to significantly impact JP Morgan’s operations in the near term. JP Morgan’s size and financial strength will allow it to absorb First Republic’s assets and loans, providing stability to the U.S. banking system in a time of stress. CEO Jamie Dimon advised, “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy and it is complementary to our existing franchise,”. You’ve no doubt noticed headlines highlighting the “second biggest bank failure in history” or the staggering $229 billion in assets held by First Republic. A significant amount, but not worrisome for a company the size of JP Morgan, with more than $3.7 trillion in assets.
Should consumers be worried about the financial system? For most, the system is sound. The FDIC has done its part by taking over failing banks and finding willing partners to take on the clients and assets. Deposits remain insured and those in charge are set to keep it that way. You will likely see more banks in the headlines. This is the nature of a changing business environment: rising rates will put a strain on the value of assets held by banks, poor management will come to light in hard times, and the stronger players will pounce when the opportunity arises.
Patrick E. Gauthier | CFP®, MSAPM
Chief Investment Officer
