By: Michael E. Martinez

One of the largest and most important financial intuitions in the United Sates are banks. In the U.S. alone, there are approximately 7,900 commercial banks that have total assets of about $7 trillion. Some major banks in this are alone are Wachovia, Bank of America, SunTrust, Coastal Federal and more. Most banks offer many kinds of financial services; these include checking and savings accounts, loans, credit cards, mortgages, business loans and trust services. The number of banks has decreased but what banks are here have gotten larger. To hear of banks merging to form a larger financial institution is not unheard of, some examples are First Union and Wachovia in 2001 and Bank of America and FleetBoston Financial in 2004.

A bank is not profitable when its liabilities exceed its assets. Unfortunately, banks can fail, after many bank failures in the early 1930s; Federal Deposit Insurance was enacted by congress. But there was strong opposition to this, it was thought that this would encourage bad banking and become a burden to the tax payer. For the first time in history of American banking, there was a lengthy period without bank runs or banking panics. A Bank run is a panic response which occurs when a large number of people in a short time take their savings out of a bank, which they fear is financially unsound and about to collapse. Things began to change in the 1970s but in the 1980s, bank failures far exceeded the total assets of failed banks in the 1930s.

The S&L crisis of the 1980s wiped out the Federal Savings and Loan Insurance Corporations better known as FSLIC. As a result, congress revised the system. In 1989, deposit insurance was consolidated under the Federal Deposit Insurance Corporation (FDIC). Two funds were set up, the Bank Insurance Fund (BIF) which covers commercial banks and savings banks; it also set up the Savings Association Insurance Fund (SAIF) which insures deposits at S&L banks. Insured banks pay a premium on all their deposits even though these deposits are not covered by insurance.

For many years, premium income exceeded the cost of failures. As the size of bank failures increased, the BIF went into the red in 1991. Instead of being declared insolvent, the losses were covered with the loans from the treasury as authorized by congress. In 1992, with increased premiums and a sharp improvement in bank proficiencies, the fund made a comeback. The BIF repaid its loans and was back on track by mid 1993. If a bank makes bad choices in loans, it can cause an inability to operate. Many believe that the cause of The Great Depression was the collapse of the banking system in the 1920s.

In 1974, the failure of the Franklin Square National Bank due to fraud made headlines, only in the financial section in the newspaper and it attracted little public notice. To most consumers the bank failures were something that happened during the depression, but in the late 1980s and early 1990s, S&L's were failing on a larger scale. These were not cases of mismanagement but a systemic problem. Deposit insurance itself and the way bank regulators managed bank failures from the point of view of bank depositors was a success.

S&L failures were so common that many people saw it almost as a nonevent. Federal regulators would quietly arrange for the acquisition of insolvent intuitions by solvent ones. A depositor might take their paycheck to the bank on Friday and see a familiar sign over the door but when they came in to withdrawal money on Monday, he might see a new sign on the door. The insurance limit of $100,000 was far more than enough to protect the average depositor.