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Upside of bank failures

By Marcie Geffner ·
Wednesday, October 27, 2010
Posted: 9 am ET

Say goodbye to five more banks, closed so far this month by the Federal Deposit Insurance Corp.:

  • Premier Bank, $1.2 billion in assets, in Missouri.
  • Security Savings Bank, $508 million, in Kansas.
  • Wakulla Bank, $424 million, in Florida.
  • Shoreline Bank, $104 million, in Washington State.
  • Westbridge Bank and Trust Co., $91.5 million, also in Missouri.

Bank failures certainly seem like bad news -- dismal, draconian, Depression-era bad news -- for investors, employees and customers. Because after all, when a bank fails, even if the assets are acquired by a competitor, that's one less business that has the potential to offer jobs, services and profits to a community.

On the upside, though, might not bank failures in the long run turn out to have an upside? Because after all, when an industry consolidates, the businesses that remain open should be stronger and more capable of operating as successful ongoing enterprises. Consolidation can mean higher prices, but it can also mean more stability.

Wouldn't it be grand if the survivor banks could make more small business loans? Originate more home mortgages? Offer higher interest rates and lower fees on checking and savings accounts? Employ more workers, who were better trained and better paid? Do all that and be more profitable for their owners as well?

The risk, of course, is that we could end up with more gigantic "too big to fail" banks that would take more excessive risks based on the belief, whether mistaken or not, that the federal government would again choose to bail them out one way or another, rather than exercise the new powers to close them down.

We'll have to wait to find out which banks will be left when the cycle of consolidation is completed. And we'll have to wait to find out whether the consolidation will prove good or bad overall for banking customers.

But while we wait, what's your prediction? A positive outcome of bank consolidation? Or not?

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1 Comment
Marcie Geffner
October 27, 2010 at 11:06 am

Update: As of Oct. 27, seven more banks have failed so far this month. Add to the list First Arizona Savings, Hillcrest Bank in Kansas, First Suburban National Bank in Illnois, The First National Bank of Barnesville and The Gordon Bank, both in Georgia, Progress Bank of Florida and First Bank of Jacksonville, also in Florida.

Bankrate offers a complete list of 2010 bank failures here.