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July 1, 2022

US bank failures: regulators take a bow

No US bank has failed since October 2020, the second longest run since the Deposit Insurance Fund was set up in 1933

By Douglas Blakey

A rather impressive US banking landmark passes as June comes to an end. It is now 614 days since a US bank failed. On Friday 23 October 2020, Almena State Bank of Almena, Kansas, was closed by the FDIC. But since then, touch wood, not a single US bank failure. Back in October 2020, to protect depositors, the FDIC entered into a purchase and assumption agreement with Equity Bank of Andover, Kansas to assume all of the deposits of Almena State Bank. On the following Monday, the branches of Almena State Bank re-opened as branches of Equity Bank. They do bank failures with ruthless efficiency in the US-and they have had plenty of practice. Some 561 US banks have failed since the start of 2001 to date. In 2008, 2009 and 2010, 140, 157 and 92 banks failed respectively.

US bank failures: none in 2018, 2021 and 2022

By contrast, no US bank failed in 2018 and only four failed in each of 2019 and 2020. The US Deposit Insurance Fund dates back to 1933 and was created by Congress and is managed by the FDIC to protect the deposits at the nation’s banks.  Only once since 1933, in a 950-day period between June 2004 and February 2007, have we witnessed a better run of no US bank failures. It is an impressive run and is testament to the regulatory system working.

Meantime, funding issues continue to cause major challenges for some of the newer kids on the block and another digital challenger bit the dust this week with the demise of Volt. This followed the December 2020 failure in Australia of Xinja.

Digital neobanks: funding challenges come to the fore

Peer digital challenger 86 400 does not go down as a failure, but was acquired by NAB in 2021 less than two years after acquiring its licence. All of this makes the success of SME-focussed Judo Bank, still going strong, all the more impressive.

As previously mentioned in this column, very few digital start-up banks have come close to break even, let alone profitability. Simon-Kucher estimates that only 5% of these challenger banks have managed to reach a breakeven point. Again, the Australian experience shows regulation working well. Consumers will not lose with the winding down on Volt. But maybe, just maybe, the message will get through to the digital upstarts that we need to hear a bit less about wonderful their CX will be; about how they will teach the incumbents how to do banking; how they are really a tech company and not a bank. To survive, they need to be properly funded. And at some point, they need to do basic, boring banking things, like lending money at a profit.

All of which suggests that the senior management at Kroo, the latest UK digital challenger to obtain a licence, must have made one really impressive pitch to its financial backers. The CEO of Kroo has offered RBI an interview to discuss the bank’s plans-and that is one interview eagerly awaited on this desk.

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