As we approach what will be the eighth anniversary of the peak of the global financial crisis, many of the effects of the crisis have subsided. But while the crisis and many of the worst of its effects have largely faded into the past, a number of litigated matters related to the crisis have continued to grind through the courts. Among other things, the wave of failed bank lawsuits – that is, lawsuits filed by the FDIC against the former directors and officers of banks that failed in the wake of the crisis – has continued to roll along. However, at this point, it looks as if the failed bank litigation has just about played out. Now that the litigation is winding down, it may be time take a retrospective look at the failed bank litigation wave.
First, the statistics. According to the FDIC’s website, the agency filed a total of 109 lawsuits in connection with the current wave of failed banks. There were a total of 518 bank failures since January 1, 2008, which means that the agency filed lawsuits in connection with about 21 percent of all bank failures. As noted below, banks have continued to fail and the agency has continued to file lawsuits in 2016, but at a much diminished rate compared to prior periods. By any measure, the wave of litigation is winding down and is just about played out, a point that was underscored in an August 10, 2016 Bloomburg BNA article entitled “Lawsuits Against Bank Directors and Officers Trending Down” (here).
The agency’s website also reports that the FDIC has authorized lawsuits in connection with 151 bank failures, meaning that the agency has authorized lawsuits in connection with about 29 percent of all bank failures. The gap between the number of authorized suits (151) and the number of suits actually filed (109) might be interpreted to suggest that there is a backlog of yet-to-be-filed lawsuits; however, the likelier explanation is that many of the authorized lawsuits were never filed, either because the agency was able to reach a settlement without the need to file suit, or the agency elected not to pursue the lawsuit for other reasons (perhaps the lack of insurance or other sources out of which a settlement or judgment might be funded).
It is worth noting that in the last twelve months, the number of authorized lawsuits has only increased by one, from 150 to 151. During the period immediately after the crisis, when the number of bank failures was rapidly mounting, the number of authorized suits grew quickly. The fact that the number of authorized lawsuits is no longer increasing reinforces the conclusion that the failed bank litigation wave is winding down.
To be sure, banks are continuing to fail, albeit at a significantly lower rate that in the recent past. Three banks have failed in 2016, with the most recent bank failure in May 2016. The number of bank failures YTD compares to the total of eight banks that failed in all of 2015, 18 in 2014, and 24 in 2013. The number of bank failures in these more recent years contrasts sharply with the number of bank failures at the peak of the post-crisis era; there were, by way of contrast, 140 bank failures in 2009, 157 bank failures in 2010, and 92 bank failures in 2011.
There was one additional lawsuit filed so far in 2016, filed on June 15, 2016. This latest lawsuit is the only failed bank lawsuit that has been filed in over 12 months. By way of contrast, during 2013,the year in which the FDIC filed the highest number of failed bank lawsuits, the agency filed 40 failed bank lawsuits.
The kinds of bank failure lawsuits the FDIC files against the former directors and officers of failed banks are subject to a three-year statute of limitation. Clearly, the lawsuits from the peak period of bank failures have either already been filed or are precluded by the statute of limitations. The peak period for the filing of bank failure lawsuits ended at least a couple of years ago. Though the bank failures have continued, the gradually smaller numbers of bank failures means that the number of lawsuits necessarily has and will continue to diminish. As time passes, the three-year cutoff means that ever more potential lawsuits are time barred. Increasingly fewer potential bank failure lawsuits will remain even potentially timely. Again, the passage of time mans that the likely number of additional lawsuits will be winding down, even, as noted in the Bloomburg article to which I linked above, with respect to the few remaining cases where the agency and the former directors and officers of a bank have entered tolling agreements.
Another sign that the failed bank litigation wave is winding down is the fact that almost all of the lawsuits the agency has filed have been resolved. Of the 109 failed bank lawsuits that the FDIC filed, 99 have been settled, and an additional suit resulted in a trial verdict in the agency’s favor. With only nine of the failed bank cases pending (including the one case that was just filed in June), the litigation is obviously winding down. It is interesting to note how many of these cases settled in just the last twelve months. A year ago, the agency had settled only 62 of the cases, meaning that the agency reached settlements in 37 cases in just the last twelve months. The fact that the agency has been moving so quickly to wind up these cases highlights the fact that the failed bank litigation is in its final stages. Interested readers may want to note that all of the failed bank lawsuit settlement agreements are available for review on the agency’s website, here.
The 109 lawsuits that the agency has filed so far have been filed in a total of 27 states and Puerto Rico. The states with the largest number of lawsuit filings so far are Georgia (25); California (15); Illinois (13); and Florida (12). The fact that these states are the ones with the highest number of lawsuits is hardly surprising as these states are also the ones that have the largest number of bank failures. Georgia had 89 bank failures; Florida had 72; Illinois, 62; and California, 40. These four states accounted for almost 60 percent of all of the failed bank failures (while at the same time accounting for about 51 percent of all bank failures).
Georgia led the league in terms of bank failures and in the number of failed bank lawsuits. With 25 lawsuits out of 89 bank failures, about 28% of all of the bank failures in the state resulted in lawsuits. Georgia not only topped the tables in these two categories, but a great proportion of its bank failures resulted in lawsuits than was the case for the country as a whole.
One slightly troublesome fact complicates the picture. That is that there are still a significant number of problem institutions. (A problem institution is a bank that the agency ranks as a “4” or “5” on its 1-to-5 ranking scale; the agency does not release the names of the problem institutions). According to the FDIC’s latest quarterly banking profile (here), as of March 31, 2016, there were still 165 problem institutions. While this figure is well down from the 253 problem institutions as of March 31, 2015, and dramatically down from the high-water mark of 884 problem institutions at the end of 2010. While the number of problem institutions remains persistently high, they are at least declining every quarter, largely as a result of merger activity.
One overarching result from all of the bank failures and the ongoing M&A activity is that there are now dramatically fewer banking institutions in the U.S. than there were in the past. In 1990, there were a total of 15,158 banking institutions in the U.S., while as of March 31, 2016, there were only 6,122 banking institutions, a decline of nearly 60 percent during that 26-year period. Moreover, in the last several years, there have been almost no new bank formations. The likelihood is that the number of institutions in the banking sector is likely to continue to shrink.
While the failed bank litigation wave is clearly in its final stages, that does not necessarily mean that bank directors and officers are in the clear. As the Bloomberg article to which I linked above notes, “senior leadership at banks may face new kinds of liability in the future related to cyber security and risks posed by third-party relationships.”