11/02/2011 02:28 pm ET Updated Jan 02, 2012

Bank Closings Slow to a Steady Downpour

In a torrential thunderstorm, the sound of rain on your roof can be deafening. Then, as the tempest eases, things seem almost peaceful. It is only when you step outside that you may realize it is still raining pretty steadily.

So it goes with bank failures. The torrential pace of bank failures in 2009 and 2010 has eased, but in the first three quarters of 2011 the downpour has still been enough to give the banking system a pretty good soaking.

In the first three quarters of 2011, there have been 74 bank failures. To understand why this feels like a slowing of the torrent of bank failures, you have to look at figures from the past two years. The current pace should result in about 100 failures in total for 2011. But this follows 140 failures in 2009, and 157 in 2010. Unless the pace of failures picks up in the final months of this year, 2011 will represent the turning of a corner, as it will be the first time since the financial crisis that the number of failures has declined. Still, the prospect of 100 failures does not mean the problem has abated. Consider that in the five years before the financial crisis (2003 - 2007), there were only 10 bank failures in total. That's why the current pace, while slowing, still represents a pretty heavy downpour.

The good news is that FDIC insurance protects bank customers from the most damaging potential losses due to bank failures. However, that doesn't mean that customers are completely insulated from the impact of those failures. Here are four ways that bank failures impact customers.

Service interruptions.The FDIC tries to make the process of taking over the operations of failing banks as orderly as possible, but a transition of this kind is never seamless. Even if your bank stays intact, another organization is likely to end up running it, which is bound to mean changes from what you are used to.

Making up for lost profits.The continuing regularity of bank failures illustrates how challenging the economics of the business remain. Investment losses, a slow economy, and new regulations have all taken a bite out of bank profits. Banks fighting to stay in business often respond by cutting savings account interest rates to the bare bones, and raising fees on checking accounts and other services. In other words, customers ultimately pay for a bank's problems.

Higher FDIC insurance levies. The FDIC has already had to assess a special levy on banks to shore up its insurance fund, and the more failing banks drain that fund, the more surviving banks will have to pay. Once again, this is a cost that is passed along to customers in the form of higher fees and/or lower savings account interest rates.

Possible loss of accrued interest. FDIC insurance covers your principal, but not any interest that has been accrued but not yet credited to your account. In these days of low savings account rates, that might not seem like much of a loss, but then again, with current interest rates so low, it's frustrating to give up any portion of them.

In short, FDIC insurance helps make bank failures bearable, but they are still bad news for bank customers.

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"Bank closings slow to a steady downpour"