Daniel Gross

The Decline of Financial Failure

As has frequently been the case in recent years, Friday was the night the lights went out for a bank in Georgia. This time it was Montgomery Bank and Trust, a two-branch bank with $174 million in assets. The bank failed and was taken over by America Bank.

Friday, July 6, was the first Friday in three weeks that a bank failed. The time off from chronicling the woes of the banking industry has given us a chance to step back and look at some trends in financial failure. For some time, it has been clear that, while pain persists in the credit markets — especially when it comes to housing — the rampant financial failure that crippled the system and the economy in 2008 and 2009 has been ebbing. As a general rule, people are doing a much better job keeping up on their financial obligations than they were a few years ago. Bankruptcy filings are down. In the first quarter of 2012, there were 332,973 filings in federal bankruptcy courts, a 12 percent decline from the 366,178 filings in the first quarter of 2011.

Real Signs of Improvement

That's not bad. But when it comes to keeping up with their credit card debt, American consumers have shown real signs of improvement. Cardhub.com aggregates data on credit card losses. Its most recent study shows that the delinquency rate on credit cards in the first quarter of 2012 fell to 3.11 percent, a sharp decline from 3.89 percent in the first quarter of 2011, and the lowest such total in the history of its time series, which goes back to 1991.

The charge-off rate — the amount of bad debt companies have to write off as uncollectable — lags the delinquency rate by a few quarters. And that metric has fallen sharply, too, from 10.16 percent in the first quarter of 2010 to 4.37 percent in the first quarter of 2012. The charge-off rate is the lowest it has been since the halcyon days of the fourth quarter of 2007. Lenders had to write off $8.77 billion in bad credit card debt in the first quarter of 2012. That's a lot, but it's far below the peak. In the second quarter of 2010, companies wrote off a whopping $21.97 billion in bad credit card debt. As David Henry of Reuters reports, these trends mean "credit cards could be one of the few bright spots in an otherwise rough second quarter for big banks." The reason: When delinquency and charge-off rates fall, banks can release funds that had been set aside as reserves against bad debt, thus improving their earnings.

Now let's turn our attention back to the banks. With the first half of 2012 now in the books, it is clear that bank failures are continuing to trend sharply down. In the first 27 weeks of this year, 32 banks with a combined $7.88 billion in assets failed. That's high by historical standards. But for comparison's sake, in the first 27 weeks of 2011, 51 banks with a combined $22.435 billion in assets failed. So the number of institutions that have failed so far this year is down 37 percent. And because the typical bank that is failing in 2012 is smaller than the typical bank that failed in 2011, the underlying assets affected by the failures are down by 65 percent from the comparable period in 2011.

Pockets of Continuing Crisis

Of course, that's not to say there aren't pockets of continuing crisis. Take housing, for example. Overall, home borrowers are doing a better job keeping up with payments. According to the Mortgage Bankers Association of America, the seasonally adjusted delinquency rate on home loans fell to 7.4 percent in the first quarter of 2012, down from 7.58 percent in the fourth quarter of 2011, and down from 8.32 percent in the first quarter of 2011. That's good news. But in the post-bust era, the Federal Housing Administration has stepped into the void left by failed mortgage lenders, playing a bigger role and assuming more risk by taking on loans with low down payments. And as Tami Luhby at CNNMoney.com reports, that is translating into higher losses for the government agency.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

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