Gauging Economic StabilityDo Fewer Bank Failures Equal Economic Recovery?
Bank and credit union failures are down, and spokesmen for the Federal Deposit Insurance Corp. and the National Credit Union Administration don't expect 2011's failures to exceed what the industry saw in 2010, the so-called "peak" year in this cycle of closures.
We can expect a steady trickle of bank failures in the U.S. to continue for the next two to three years ...
So far, 66 banking institutions have shuttered. At the mid-July mark last year, 100 institutions had already failed. From that perspective, we definitely appear to be moving in a positive direction.
On the whole, 2010 saw 157 banks and 19 credit unions close.
But Tom Wills, a fraud analyst at Javelin Strategy & Research, says we shouldn't be too quick to exhale a sigh of relief. "We're still in a prolonged period of delayed fallout from 2008," he says. "We can expect a steady trickle of bank failures in the U.S. to continue for the next two to three years, especially if the underlying economic recovery remains uncertain."
Interesting. How uncertain is the underlying economic recovery? Well, since we don't really know, I'm going say it's pretty uncertain.
At the beginning of the year, Christie Sciacca, a former FDIC executive overseeing bank-rescue projects who now works for economic advisory firm LECG, said increased consumer spending and an improving employment rate were good measurements to gauge economic recovery.
"Consumers are confident enough to have increased their borrowing a bit," he said. But he added, "The numbers suggest a slow recovery."
Consumer lending in the current economic environment remains stringent, so relative to pre-2008 years, lending is down, and by a significant amount. Consumer spending has seen fluctuating upticks, primarily during the 2010 holiday-shopping season; but relative to pre-downturn years, spending numbers also remain low.
"That's the bad news," Javelin's Wills says. "The positive side of this is that the industry should emerge leaner, healthier and more open to innovation from this ordeal, but we're still a ways away from that."
But let's not forget the effects globalization now have on our domestic and international economies. It's difficult to gauge economic recovery in a vacuum. We may see fewer institution failures within U.S. borders, but overseas mergers, acquisitions and failures, as well as fluctuations in the value of the euro, also have an impact.
For now, it may be too soon to say whether we are actually recovering or just holding our own.