Are banks failing at too slow a pace? That might seem like a preposterous question, but the idea that we are going to have a lot of bank failures in the next few years, so we ought to get them out of the way quickly seems to be taking root in some quarters.

It’s easy to forget how normal bank failures usually are. There were none at all in 2005 or 2006 and only three in 2007, so the eight failures we’ve experienced so far this year — four in the last two months — may seem like a lot. However, experts cited in a recent Washington Post article expect “a few hundred” failures over the next several years. If that’s the case, they argue, let’s get the painful experience over with as quickly as possible, they argue.

In fact, some people claim the regulators are currently delaying failures by allowing some banks to maintain unrealistically low loan loss reserves. If bank reserves reflected reality, these experts assert, a number of open banks would already have been closed. The longer these banks are allowed to remain open, the greater the potential losses when they do close. The regulators “are dragging their feet in forcing these banks to reserve realistically,” consultant Bert Ely told the Post. “Some of these banks could have been closed two or three quarters earlier.”

Not so, the regulators insist. Deputy Comptroller Robert Garsson noted that regulators must balance a troubled bank’s chances of recovery against the cost of continued losses. “We save a lot of banks by being able to work with them, avoiding failures that would be costly to the insurance fund,” Garsson told the Post. “The only ones that people see are the ones that fail.” Garsson observed that the OCC shut the First National Bank of Nevada in July while its capital levels were still well above the level at which closure becomes mandatory.

Healthy Banks Will Pay

In any case, healthy banks will ultimately pay for troubled banks’ demise in the form of higher deposit insurance premiums. Just one of the recent failures — that of IndyMac — will likely cost the Deposit Insurance Fund (DIF) between four and eight billion dollars. The other failures this year have cost just a bit over $1 billion total. Assuming the worst for the IndyMac collapse, failures incurred so far this year could reduce the FDIC’s reserves by 17 percent. This year’s failures already are enough to force a hike in FDIC premiums to avoid reserves dropping below the 1.15 percent statutory floor.

At the end of the first quarter, the FDIC reported that the Deposit Insurance Fund’s reserves stood at $52.8 billion. It also reported that its “problem list” of troubled banks had grown by 18 percent in the first quarter, to a total of 90 institutions with combined assets of $26.3 billion. If past experience holds, thirteen percent of the banks on the “problem list” will fail.

The question is how quickly the agency will replenish the fund. The industry is very concerned that the FDIC will beef up the fund too quickly. The FDIC Reform Act requires the agency to act when reserves fall too low, but it also allows up to five years to fully recapitalize the fund.

Regardless of the pace of bank failures, the industry would definitely prefer the FDIC go as slowly as possible when it comes to collecting premiums from the industry. After all, the American Bankers Association says, each one-cent rate increase reduces the funds that banks have to make loans by $5 billion.