The financial crisis in 2008 marked the beginning of a catastrophe for the banking industry in the U.S. In the wake of Lehman Brothers’ collapse, many financial institutions faced the fate of closure because of the purchase of toxic assets such as mortgage-backed securities.
In 2010, 157 banks failed, making that year the peak of bank failures in a decade. In contrast, during the pre-crash period of 2005 and 2006, no banks failed at all.
While the crisis sent the whole industry into a tailspin, some states were hit harder than others. Georgia, Illinois, Florida and California were among the states that saw the most bank closures. Georgia topped the list with 90 bank failures in 2010.
“These states were heavily involved in financing construction and land development,” said Keith Leggett, senior economist at American Bankers Association.
When the housing market collapsed, many local real estate borrowers defaulted on their bank loans. As bad debts piled up on the balance sheets, some community banks went under.
“Illinois did have home prices decline, but they probably weren’t as severe as places like Florida,” said Richard Brown, chief Economist at the Federal Deposit Insurance Corp. “You also have a lot of banks in Illinois, which tend to boost the level of failures as well.”
Chicago, a traditionally over-banked city, saw 15 bank failures in 2010, the highest number among a group of cities measured across the country.
The majority of the banks that failed were small community banks. Unlike mega banks with trillions of total assets, these banks usually held less than $1 billion. With limited capital, they were more vulnerable to the crisis and thus more likely to fail.
Although the pace of bank failures has slowed down from 2013 due to the economic recovery and rising property prices, the banking industry is not all the way back to the single-digit failure level prior the crash. The number of troubled banks continue to be high and is being closely watched by regulators. And the growth path for the whole industry remains bumpy.