Please ensure Javascript is enabled for purposes of website accessibility

1 Chart Every Bank Investor Needs to See

By John Maxfield – Feb 1, 2015 at 12:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A chart of annual bank failures going back to 1865.

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.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of PNC Financial Services and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.81 (1.95%) $0.78
The PNC Financial Services Group, Inc. Stock Quote
The PNC Financial Services Group, Inc.
PNC
$151.59 (2.40%) $3.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.