Fisher Investments Editorial Staff

Banks and Capitalism

By, 02/25/2010

Story Highlights: 

  • Fed Chairman Bernanke, in a House Financial Services Committee testimony, emphasized the need to keep interest rates low to support the "nascent" economic recovery.
  • This continued accommodative monetary policy likely has (in part) the still-struggling banking industry in mind.
  • So far, bank failures in 2010 total 20—and with another 702 banks on the FDIC's "problem list," 2010 is expected to have more failures than 2009.
  • The FDIC administers bank failures while maintaining a functioning financial system.


In his testimony to the House Financial Services Committee on Wednesday, Fed Chairman Ben Bernanke emphasized the need to keep interest rates low to support the "nascent" economic recovery, citing low inflation and high unemployment as important reasons to keep economic wheels greased with ample liquidity for awhile yet.

While the news isn't too surprising, folks likely watched Chairman Bernanke's testimony closely after last week's unexpected discount window rate hike. The Fed stated then—and Bernanke reiterated today—the rate rise didn't mean the Fed changed its outlook for the economy or monetary policy. The Fed's continued accommodative monetary policy is encouraging for—and likely partly targeted at—the struggling banking industry. Though the system has stabilized enough to allow for a higher discount rate (which, in itself is a signal the crisis is passing), smaller banks continue to fail.

As we've said before, bank failures are nothing new and are par for the course after financial crises. Since its creation in 1933, the Federal Deposit Insurance Corporation (FDIC) has proven itself equal to the task of keeping the country's banking system functioning during difficult economic times. Bank failures during the Savings and Loan crisis—206 in 1987, 200 in 1988, and 184 in 1989—help put 2009's 174 failures in perspective. If history is our guide, banks will continue to fail this year (20 have so far), and with 702 institutions identified as "problem" banks, more may fail in 2010 than in 2009. That may seem like a lot of foundering institutions, but it's just a fraction of the number on "watch lists" in 1987 (1,575 banks), 1988 (1,406 banks), or 1989 (1,109 banks). The late eighties and early nineties were a nasty period for banks to be sure, yet the S&P 500's total return from 1985-1992 (all years with over 100 bank failures) averaged +17.4% per year—well above the long-term average. And banks are failing now, not because of loans made today, but because of loans made years ago—their struggles reflect past conditions, not the present or the future.

Today's banking troubles exemplify capitalism at work—where the weak fail and the strong survive. But while failures in other industries don't typically have system-wide repercussions, we must be more careful with banking to avoid imperiling its beneficial ties to all industry. As FDR once said, banks play a key role in putting our money "to work to keep the wheels of…industry turning around." Fortunately, the banks failing today aren't systemically important behemoths—they're much smaller regional banks. Typically, these failed institutions and their assets are sold quickly. The FDIC insures deposits up to the elevated $250,000 limit and often absorbs losses from troubled loans. Many branches remain open in the name of acquiring banks. And depositors have access to their funds throughout the transition. Our system appropriately administers most bank failures while maintaining a functioning financial system—a hallmark of a mature capital market and a key reason stocks can move forward despite troubled Financials.  

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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