If you're even remotely interested in bank stocks, then here's something to keep in mind: Banks fail all the time. I don't say that to dissuade you from investing in banks, as there are some brilliantly run lenders out there, but rather to emphasize the importance of picking only the best.
You can get a feel for the frequency of bank failures in the chart below, which takes data from the FDIC's annual report of 1934, its inaugural year, and combines it with the agency's updated failed bank list here. As you can see, failure is the rule when it comes to banks, not the exception.
Since the modern banking era began in 1865, more than 17,300 banks and other types of depositary institutions have failed. That averages out to 116 a year -- though, of course, this average is somewhat misleading given that banks tend to fail in waves. These waves occurred frequently before the legislative and regulatory changes implemented in the Great Depression, during which roughly 6,000 banks failed. Since then, it's happened only twice.
The first modern wave occurred in the 1980s and 1990s, and was triggered by the high interest rates of the Volker era. Most people think of this as the S&L Crisis, though there were two additional crises that took place simultaneously. Mutual savings banks failed throughout New England in the early 1980s. And in the early 1990s, a commercial real estate slump caused the downfall of overexposed commercial lenders.
The second modern wave was the financial crisis of 2008-2009, after which more than 500 banks failed while many others avoided insolvency by selling out to better-heeled competitors. Two examples of the latter are Wachovia, which is now part of Wells Fargo, and National City Corporation, which is now part of PNC Financial.
With this history in mind, I'd encourage investors to focus on two takeaways. The first is the obvious risk of investing in bad banks. I trust the chart speaks for itself on this point. And the second is the corollary opportunity of investing in good banks, which benefit tremendously from the intermittent carnage. Indeed, it's hard to think of a better way to gain market share than simply sitting back and allowing your opponents to commit unforced errors.
