Posted on Friday, March 18, 2011
There were 157 U.S. bank failures last year, which sounds like another bad year for American banks until you realize that more than half of those failures -- 89 of them -- occurred in just five states. In contrast, twenty states had no bank failures at all. Clearly, banking is much more dangerous in some states than in others.
To give you a sense of where your state stands, MoneyRates.com has assembled a list of the most dangerous states for banking.
Local risk factors
The failure of any one bank can be traced to a number of factors specific to that bank. However, the fact that bank failures seem to occur in clusters, heavy in some states, light in others, suggests that there are risk factors specific to certain areas.
How can a bank's location affect its likelihood of failure?
• An especially bad economy: Three of the five worst states by number of bank failures, and four of five by percentage of failures, had double-digit unemployment rates.
• A bad real estate market: Three of the worst states by number of failures, and two by percentage of failures, have seen real estate market declines of 25 percent or more.
• Lax enforcement: Bank supervision is a mish-mash of state and national regulations and oversight. For the many state-chartered banks, their state banking department is the key monitor of performance and risk. It's fair to say that some states might have been better served by stricter regulations and/or more assertive oversight.
Nationally, only about 2 percent of banks failed last year, but the five worst states had failure rates in excess of 5 percent. Evidently, some or all of the above local factors may have played a role.
The most dangerous states for banking
First, here are the states that had the most bank failures in 2010:
1. Florida, 29 failures
2. Georgia, 21 failures
3. Illinois, 16 failures
4. California, 13 failures
5. Washington, 10 failures
However, looking at the list this way isn't entirely fair, since some states have much bigger banking markets than others. So, here are the states with the highest failure rates--failures as a percentage of the total number of banks in the state:
1. Washington, 9.01 percent failure rate
2. Florida, 8.55 percent failure rate
3. Nevada, 8.00 percent failure rate
4. Georgia, 6.54 percent failure rate
5. Oregon, 5.08 percent failure rate
On this basis, Illinois and California drop off the list because their relatively large banking markets put the number of failures into perspective (somewhat--California still had a fairly ugly 4.01 percent failure rate). Nevada and Oregon join the list because even though each had only a few failures, they represented a high percentage of those relatively small banking markets.
Finally, some good news. 20 states plus the District of Columbia had no failures at all. 33 states plus the District of Columbia had failure rates of less than 1 percent. Top honors go to Iowa, which had the highest number of banks (381) of all states that had no failures.
An online or a branch-based bank may have operations in several states, but it is considered based in the state in which it is headquartered. The business exposure of most banks tends to be concentrated heavily in the state where it is headquartered, though in theory the more geographically diversified a bank's operations are, the less exposed it would be to the economics of any one region.
As for the states with shaky banking records, the best defense for residents of those states might be to look for a national bank with an out-of-state headquarters--as long as that headquarters isn't in one of the other troubled states.
Richard Barrington, CFA, MoneyRates.com