The Financial Crisis: The Fallout Ten Years Later

The financial industry today looks nothing like it did prior to the meltdown in 2007 — hardly recognizable. Today, there are a third fewer banking providers, and 5,000 less branches. Banks and credit unions who survived the fallout from the subprime debacle have been indelibly transformed, beset by a whole new array of challenges — fintech startups, bigtech threats, digital disruption, regulatory burdens, and CX hurdles.

Historians broadly agree in designating October 28th and 29th, 1929 as the start of the Great Depression. Over the course of those two days, the value of the Dow Jones Industrial Average declined by a combined 25% on then-unprecedented trading volumes.

Though the demise into recession and then depression ensued over several months, the market crash offered a clear point of demarcation from vibrant- to stagnant economic cycles.

There was no single corresponding event that clearly demarcates the global financial crisis of 2007 and 2008. Signs emerged as early as 2006 with erosion in the U.S. housing market, but the crisis would not reach full force until the September 2008 implosions of Lehman Brothers, the government- sponsored FNMA and FHLMC mortgage enterprises, AIG, Wachovia, Washington Mutual, and others.

However, an article in Bloomberg BusinessWeek magazine designates an unofficial start of the crisis in March 2008, with the failure of Bear Stearns and its agreement to sell to JP Morgan Chase for a re-sale price of $2 per share. That designation would leave us now ten years removed from the crisis’ onset, a notable interval on which to examine how the crisis affected the banking industry.

From a delivery standpoint, the banking environment has changed dramatically in those intervening ten years. The financial crisis initiated a winnowing of institutions, including some of the largest banks in the U.S. — Washington Mutual, National City, Wachovia, Colonial and IndyMac all were acquired either on the precipice of failure or upon actual FDIC seizure. And in each of those cases but IndyMac, acquirers with overlapping branch networks consolidated hundreds of redundant branches in the ensuing years.

In all, the past ten years saw more than 500 banks and more than 300 credit unions fail. A far greater number of institutions would disappear in open-bank (or credit-union) distress sales, unassisted by the federal insurance funds but still precipitated by likely future insolvency. At least partially due to the financial crisis, the number of financial institutions has declined precipitously in these past ten years… by a staggering 32%.

In 2007, there were 8,500 banks (including thrifts) and 8,100 credit unions in the U.S. Today, there are 5,700 of each institution type.

Branch counts have also declined over the past ten years, though less acutely than the decline in the count of institutions. In 2007, there were 114,000 bank and credit-union branches across the U.S. Today, that count has declined to 109,000.

This 5,000-unit change does not accurately depict the volume of closures in recent years, as branch counts peaked not in 2007, but rather in 2009 as banks brought the full volume of projects in queue pre-crisis online. Thus,the current branch count, though down only 5,000 units from 2007, has declined by about 9,000 units from peak levels.

That level of consolidation has yielded larger, stronger institutions. Among the thousands of branch closures that followed the worst of the financial crisis, more than half represented direct overlaps that arose from acquisitions. As a result, many branches derived greater revenue streams from the same trade areas and with the same fixed asset and non-interest expense levels, thereby improving operating efficiency.

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Because the number of institutions declined by a greater proportion than the number of branches, average network sizes have increased over the past ten years. The remaining banks now carry an average of 16 branches each, compared to 12 in 2007 (or 3.5 branches per credit union versus 2.3 in 2007). The contraction in branch counts plus natural growth (i.e., from inflation, population growth, and other persistent economic factors) has yielded larger branches, too. The median mature branch (open at least five years) now carries deposits of $50M compared to $38M in 2007, with the average increasing to $63M from $50M ten years prior.

However, the combination of fewer branches and a rising population has diluted branch-coverage ratios. In 2007, the U.S. supported one branch for every 1,030 households. Today, that ratio is one branch for every 1,130 households. That shift likely reflects more than the post-crisis winnowing of overlapping and unprofitable branches, but also a belief by financial institutions that the rise of electronic channel alternatives can allow some degree of reduced physical coverage.

Aggregate consumer and small business deposits have increased by 40% over the past ten years, but that growth did not occur linearly. Rather,the financial crisis sparked a period of volatility in deposit growth rates, with a ‘flight-to-quality’ spike in 2009 followed by several stagnant years, and then growth returning to a steady 4% to 5% annual clip in the past three years. As national banks either deliberately shed deposits due to excess liquidity or were hampered from growth by a focus on problem assets, credit unions’ share of retail deposits crept upward, to 16% today from 13% in 2007.

With most regions of the country having escaped the worst impacts of the recession by 2014 or 2015, many measures of bank profitability have returned to pre-crisis levels. The regulatory environment carried measurable impact in reducing fee income, which declined from 2.2% of assets across the banking industry in June 2007 to 1.5% ten years later.

However, offsetting gains in non-interest expense levels left the industry’s efficiency ratio at the same 57% level as ten years prior. To the negative though, return-on-asset levels remain about 20 basis points short of pre-crisis levels, and problem assets also remain higher as banks work through the last of the post-crisis issues.

In one example, the ratio of non-current assets plus other real estate owned to assets sits at 72 bps, versus 62 bps in June 2007, and as low as 50 bps in prior years. Other credit-quality ratios track similarly.

In sum, an industry that at its nadir placed 12% of all banks and thrifts on the FDIC’s troubled institution list has now escaped most of the impacts of the financial crisis, emerging with a smaller footprint, greater share concentration in the hands of fewer banks, and near comparable earnings and efficiency ratios.

Neverthelesss, the greater concentration and reduction in delivery options could carry adverse implications for consumers, perhaps creating opportunity for a new wave of entrants in certain markets.

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