Like other businesses, banks did not have a COVID-19 playbook to open when the pandemic broke out this year. But despite some difficulties earlier, most institutions fared rather well, which is also good news for banks and depositors.

The contrast to the previous recession is stark – compared to the 157 banks that went bankrupt in 2010, for example, only four have gone bankrupt so far in 2020, the Federal Deposit Insurance Corp. reported.

And while the FDIC cited 884 “problem” banks a decade ago, that number now stands at 56. The agency doesn’t name which institutions have sounded the alarm.

The FDIC insurance fund, which supports depositors’ losses in bank failures, has more money than in previous years, although not quite up to what it should to be. This is in part the result of an influx of deposits that poured in earlier this year when Americans received federal stimulus checks. (Contributions paid by banks to support the insurance fund have yet to keep pace.)

There is even evidence that more Americans are tied to the banking system through checking and savings accounts – a factor that could lead to improved personal financial results for many Americans. Digital services have helped in this regard.

Some clouds on the horizon

The banks are not out of the woods yet. During the last recession, financial pressures from banks persisted for a few years after the recession officially ended, as it took some time for bad loans to subside. Lending also remains a concern today, and banks don’t earn as wide an interest rate spread as they normally do.

“The low interest rate environment, deteriorating credit quality and declining loan growth continue to challenge the industry,” warned Diane Ellis, FDIC division manager, in a commentary on latest quarterly results.

The year has not started well. Banking sector profits plunged in the first two quarters of 2020, partly due to pressures from COVID-19 and partly due to new regulations forcing banks to recognize potential problem loans earlier. When they increase provisions for losses, banks incur expenses that eat away at profits.

There is another major drag in the form of unusually low interest rates, which makes it more difficult for banks to achieve a positive spread between what they pay depositors and what they earn on loans. This “net interest margin” shrank to 2.68% in the third quarter, a record low.

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Fundamental force intact

But so far, loan clients have not shown too much distress overall, despite higher unemployment and problems for business clients in industries such as hotels, restaurants and real estate. commercial.

A notable and surprising bright spot is the housing market, which has boomed in contrast to the last recession, fueled by low interest rates.

While concerns about the economy have eased somewhat, banks have recently spent less money on loan loss provisions, which is a big part of the industry’s rise in profits to $ 51.2 billion. dollars in the third quarter, against 18.8 billion dollars in the second. About 95% of banks are currently profitable.

Credit unions, unlike banks, are nonprofit associations owned by their members and therefore do not experience the same pressures on profits. But here, too, the trend is favorable with only one failure so far this year, reports the National Credit Union Administration, which insures such institutions as the FDIC insures bank deposits. This is a drop from 28 failures in 2009 and 2010.

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Deposit risks remain low

Throughout the year, depositors in banks and credit unions did not have to worry much about the safety of their money. The FDIC fund for banks has $ 116 billion to protect depositors in the event of default, or 1.30% of insured deposits.

However, this ratio is slightly lower than the 1.35% level it is supposed to be, which the FDIC attributed to the increase in deposits in the first two quarters when the economy stumbled and more people took a hit. suddenly had stimulus money in their accounts. Third quarter deposit flows were at a more normal pace.

Bank failures usually don’t result in losses for depositors anyway. In most cases, the bank that intervenes to take over the failing institution, under the supervision of the FDIC, usually assumes all obligations. Clients are protected, at a minimum, up to $ 250,000 in deposits per institution. The four bank failures so far in 2020 have been distributed geographically, with one each in Florida, Kansas, Nebraska and West Virginia.

While failures are not a concern, ultra-low returns are an issue for depositors. Money market bank accounts paid about $ 4,700 in interest on average in 2007 on a typical deposit of $ 100,000, according to Bankrate.com. Today, the same deposit earns just over $ 200.

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A more inclusive system

Compared to previous years, more people are now linked to the banking system. In October to study, the FDIC reported a record 95% of households with at least one bank or credit union connection, such as a savings or checking account (the figure was slightly better, over 96%, in the region Phoenix Metro).

Experts who track income inequality cite banking connections as a key factor that can improve consumers’ finances. Checking and savings accounts provide security of funds and access to mortgages and other banking products, along with cheaper bill payment services and other benefits.

The study, based on 33,000 surveyed consumers, was conducted in 2019. The proportion of unbanked households has likely increased this year due to coronavirus-related business closings and layoffs, the FDIC said.

Among consumers who still do not have an account, lack of money and mistrust of banks are the two main reasons cited. Compared to the 3% of white households without a current or savings account, 14% of black households remain unbanked, as do 12% of Latino households.

Important mobile services

The increase in the number of households with bank connections has been helped by an increase in the number of people using mobile banking services, the FDIC said. Compared to most other businesses, banks were well positioned to deal with customers remotely after COVID-19 branch closures, as they had made significant technology investments in previous years.

Banks offering premium online and mobile services have achieved high satisfaction ratings “in a year where mobile apps and websites have become a vital lifeline for banking customers,” said Paul McAdam, Managing Director lead researcher JD Power, who recently published a customer satisfaction survey.

Capital One ranked first of the eight mega-banks examined in the study, Chase second and PNC third. JD Power received feedback from approximately 8,900 bank customers in August and September.

McAdam said it was noteworthy that Capital One scored highest in the Consumer Satisfaction Survey despite cutting its branch numbers by nearly half over the past five years. Fewer customers are visiting branches – a trend that began long before the coronavirus outbreak.

Reach Wiles at [email protected].