The U.S. financial system has experienced its fair share of turbulence over the decades.

From panic-driven deposit runs to a plethora of bad loans, the cycle of bank failures has been a recurrent theme.

In the late 1980s, the savings and loan (S&L) crisis eradicated over $400 billion in assets and nearly one-third of all S&L institutions.

More recently, the Great Recession witnessed the downfall of major banks, including Washington Mutual, with the bank holding approximately $300 billion in assets at the time of its collapse—the largest in U.S. history.

Over the years, regulators have tried to prevent crises like these from happening again. Yet, even with tighter lending standards and higher reserve requirements, banks have still failed…

Just last year, Silicon Valley Bank, First Republic Bank, and Signature Bank collapsed all within the span of a few days. They lost more than $500 billion combined before being bailed out by the government.

There have been over 560 bank failures in the U.S. since 2000. By comparison, in Canada, less than 50 banks have collapsed since the 1960s. Canada has chosen a more stable approach to its banking system… but that’s also part of why the U.S. economy has grown so much faster.

And every time U.S. banks fail, there seems to be a new cause.

Banking regulations don’t prevent banks from collapsing, they just force banks to find another way to make money.

During the Great Recession, extremely risky mortgage-backed securities caused banks to collapse.

Last year, banks struggled because they had so much money in U.S. Treasurys… which lost value as interest rates surged.

Today, many regional banks are taking huge losses due to the troubled commercial real estate (“CRE”) market. That’s what nearly took out New York Community Bancorp (NYCB) earlier this year.

And although NYCB narrowly avoided collapse, CRE is still in trouble.

Office buildings are sitting empty. And many CRE operators are starting to send the keys back to their lenders. That means banks like NYCB aren’t out of the woods just yet.

Smaller regional banks are going to get hurt by their CRE exposure. And most won’t be so lucky as to be bailed out.

While it’s nice to think that the U.S. financial system has learned its lesson from past crises, there are bound to be more bank failures from here.

Delinquency rates are at record levels. And banks are setting aside more money for loan-loss provisions – a safety net for when loans go bad.

The good news is that the most exposed banks are smaller, regional banks. The Banks considered “too big to fail” aren’t going to feel the pain, whenever it pops up.

The big banks have much more diverse loan exposure, so pain in the CRE market isn’t likely to topple them.

Plus, banks aren’t going to start failing for some time.

Today’s banking troubles just aren’t as bad as they were in the Great Recession or even the S&L crisis.

According to data from the Federal Deposit Insurance Corporation, five banks failed in 2023. That’s not great. However, it’s not nearly as many as after the 2008 crisis.

Take a look…

Now, the recent bank closures did result in significant asset losses. The five bank failures wiped out about $550 billion.

However, that hasn’t translated into a huge wave of bank failures like it did during the Great Recession. Even though it’s a bit bigger than the failures in the 1980s and 2008, our economy is a lot bigger, too.

So, while CRE is likely to be the center of a small wave of bank failures, it’s unlikely to be anything like what we saw in 2009.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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