Smaller Banks Failing in 2009 in Huge Numbers

Recently, it was announced that the number of banks that have failed in 2009 reached 100, in an article on CNN .Com that the total is now 106. Why are so many banks failing? Obviously, it has to do with the current recession, and the large number of bad loans made to banks. According to CNN this is the highest number of banks to close any given year, since 1992 when 181 banks failed, and the year ain't over yet.

However, because bigger banks have been bailed out by the Federal government, they are more able to deal with toxic assets such as mortgages that homeowners are unable to make payments on. Smaller banks, and the other hand, are not too big to fail. And the FDIC is assuming control of a large number of these banks, and their customers, which most likely will be sold to medium sized banks and corporations.

Ironically, the attitude that some banks are "too big to fail" will probably become more prevalent as there truly will be a smaller number of banks in control of the financial system in the United States such that more of the bank's at the top of the financial food chain will truly become too big to fail.

Given that the world, and the United States, need a certain number of banks, it seems likely that the larger banks will survive, while many smaller banks will go the way of the dinosaur. What is this mean for investors? Stocks in big banks such as Citigroup, which I should disclose I am an investor in, will rise over the next couple of years as they absorb much of the business done by the smaller banks, and as they will survive this recession, albeit with government help, they will be in the best position to profit from future growth.

Fortunately, depositors with small banks will be able to recover most funds held in those banks up to $250,000 in total assets. Obviously, people nearing the age of retirement may have more than this amount in one bank, often such depositors are recommended to deposit their money in several different banks to protect against the possibility of failure in a given bank.

For the individual investor, now might be a good time to buy relatively devalued stock in large banks such as Wells Fargo, Bank of America, and Citigroup.

Sources:

Bank failures stack up: Now 106 for 2009
http://money.cnn.com/2009/10/23/news/economy/bank_failure/index.htm