The First State Bank based in Barboursville, WV has become the first bank to fail since the coronavirus pandemic spread across the United States. The Federal Deposit Insurance Corporation (FDIC) made this announcement on Friday.
The FDIC noted “The First State Bank has experienced longstanding capital and asset quality issues, operating with financial difficulties since 2015.” Moreover, the bank’s capital levels as of Dec 31, 2019 were too low for legally staying operational.
Therefore, all four branches of The First State Bank, along with its deposits and certain assets were immediately acquired by MVB Bank Inc., a wholly-owned subsidiary of MVB Financial Corp. MVBF. As of Dec 31, 2019, it had nearly $139.5 million of total deposits and $152.4 million in total assets.
While the bank’s failure was not a result of coronavirus woes, slowing down of the economy owing to the pandemic could result in a spike in such cases.
Per the list available on FDIC, there have been more than 550 bank failures since October 2000. The majority of these occurred in the decade following the 2008 financial crisis, with the failure of Washington Mutual — which was acquired by JPMorgan JPM — being the most notable one.
The primary reason for bank failures during the ‘Great Recession’ was liquidity crunch. Although signs of the impending recession had started showing as early as 2006 (as housing prices began to fall and yield curve inverted), the Federal Reserve and government administration failed to realize the gravity of the same.
Banks had become increasingly dependent on derivatives and sold mortgage-backed securities (backed by sub-prime loans) to investors. Thus, what had started as a housing market crisis gradually spiraled out of control and in turn spread across the finance sector.
Thus, a large number of small and mid-sized banks had failed and were acquired by rivals. Some of the acquirers included PNC Financial PNC, Bank OZK (earlier known as Bank of the Ozarks), U.S. Bancorp USB, Ameris Bancorp and Westamerica Bancorporation WABC. A few other financial giants like Bear Sterns, Merrill Lynch and Wachovia did not fail but were acquired by rival banks such as Bank of America BAC and Wells Fargo WFC.
While the administration undertook initiatives to strengthen the U.S. economy, banking regulators wanted stricter rules. With the passage of the Dodd Frank Act in 2010, banks were required to comply with several stringent regulations and strengthen their balance sheets by moving away from non-core operations.
These efforts were able to bring the U.S. economy back on track and establish banks’ footing. Thus, bank failures gradually declined, with no failure reported in 2018. However, there were four bank failures last year. Moreover, one bank — Ericson State Bank — failed this February.
Will Coronavirus Mayhem Spike Bank Failure Numbers?
At present, majority of the banks are financially sound with solid liquidity position and fundamentals. They have undertaken strategic restructuring measures to confront any financial crisis.
Also, big banks are required to maintain higher level of capital and undertake Fed-mandated annual stress test to check their financial stability. While coronavirus-related crisis is hurting the U.S. economy, which is at a high chance of going into recession, majority of banks are expected to tide over this crisis.
However, as banks’ financials majorly depend on the nation’s economic health, slowing down/ recession and near-zero interest rates are expected to significantly hurt their profitability. Therefore, banks that are not fundamentally strong at present are likely to fail.
The numbers, though, are not likely to be as huge as it were between 2008 and 2018.
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Click to get this free report JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report U.S. Bancorp (USB) : Free Stock Analysis Report Bank of America Corporation (BAC) : Free Stock Analysis Report Westamerica Bancorporation (WABC) : Free Stock Analysis Report The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report Wells Fargo & Company (WFC) : Free Stock Analysis Report Mvb Financial Corp. (MVBF) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research