WASHINGTON — It was a year that saw the fall of Washington Mutual Inc., the largest bank failure in history, the collapse of IndyMac Bank, the most expensive failure in 20 years, and more bank closures than at any time since the savings and loan crisis.

Still, many observers are asking: Why wasn't it worse?

Despite dire predictions and a financial crisis unlike anything faced in the past seven decades, only 25 banks failed — well short of the hundreds some had predicted at the beginning of the year.

Observers offer a range of reasons, from the government's direct investment in healthy institutions — which spurred some banks to buy troubled ones — to its efforts to back bank debt and guarantee liquidity. They also cite a lagging business cycle that has yet to finish off some troubled institutions, regulators that are stretching out the timetable for failures to conserve resources and prevent panic, and other factors.

Though observers agree 2008 was not as bad as expected, most continue to have a bleak outlook for next year. They say the pace of failures — which accelerated dramatically since IndyMac failed July 11 — is liable to increase.

"Next year will probably look much like the second half of this year," said Robert DeYoung, a finance professor at the University of Kansas' School of Business. "This process crosses the year, and failures tend to lag business activity. Even though we're way below what some people expected, we should continue to see banks become insolvent as we go forward."

The Federal Deposit Insurance Corp. is clearly anticipating as much. It nearly doubled its budget for next year, to $2.24 billion, with the vast majority of the money going to its resolution and receiverships division. That division is expected to add more than 800 employees to keep up with the pace of failures.

There were 171 institutions on the troubled-bank list, holding $115.6 billion of assets, at the end of the third quarter. Most experts said they expect that list to grow.

But several industry watchers said some of the government's actions have prevented the failure tally from reaching the expected triple digits. The Treasury Department has pledged $250 billion to invest directly into banks, and has distributed all but $80 billion of that.

Though Treasury officials said the money would not go to ailing banks, some troubled institutions have clearly benefited from it. Central Pacific Bank in Honolulu said Dec. 9 that it had received $135 million from the Treasury's Troubled Asset Relief Program — the same day it announced a memorandum of understanding with federal and state regulators. The $5.4 billion-asset bank said it planned to use the money to increase its capital ratio to 9% within six months.

Other institutions have used the extra capital to buy failing banks. Analysts said they doubted National City Corp. could have survived on its own without PNC Financial Services Group Inc.'s offer to buy the Cleveland banking company. Also some large insurers have struck deals to acquire troubled thrifts in order to have access to Treasury capital.

"Absent the intervention, there would be more bank failures," Prof. DeYoung said.

"More capital reduces the probability that a bank is going to become insolvent. Clearly the injection of about $250 billion of capital at this point will reduce the number of bank failures. For banks that were going to fail and maybe still will fail, it'll slow down the process."

Randy Dennis, the president of DD&F Consulting Group in Little Rock, said the bailout money available through Tarp may prevent some failures next year.

"Nobody is going to acquire the really sick banks," he said. "But to acquire marginal banks — banks that aren't doing well that might be a failure at the end of next year if they can't get capital — they can be good targets and the Tarp money can certainly be used for that."

Though the decision to fail a bank ultimately resides with the chartering agency, not the FDIC, some said the agency has also been managing the pace of failures this year to avoid a resource crunch and prevent further deposit panic.

"The agency is always going to manage a failure schedule not only for their own resources, but most importantly for the public," said Robert Hartheimer, a special adviser at Promontory Financial Group LLC and a former director of resolutions at the FDIC. "If there were more than two or three failures on a weekend, I think it logistically would be very difficult for depositors and stakeholders of those institutions," and "it probably sends a more drastic message than the situation really is."

But the agency's handling of certain failures has been both praised and criticized for departing from ordinary practice.

The most notable case was IndyMac, which failed after its mortgage portfolio became toxic and Sen. Charles Schumer, D-N.Y., went public with letters that expressed concern about the thrift's condition and may have hastened its collapse.

Without any buyers, and needing a vehicle for managing IndyMac's operations, the agency held the institution under a newly chartered conservatorship.

The result was a shower of news coverage, some of it erroneous, that panicked many depositors. Lines of insured and uninsured depositors — not familiar with the ramifications of an FDIC takeover — crowded IndyMac branches, many demanding their money. It was the first known bank run to occur after an institution had already collapsed.

The failure hurt other banks in Southern California, whose depositors withdrew funds as a result, and other institutions suddenly faced new questions from anxious customers.

The IndyMac collapse cost an estimated $8.9 billion — one of the most expensive failures since the savings and loan crisis.

Observers said that experience influenced the way the FDIC handled the subsequent 20 failures.

"It's fair to say that the FDIC did not want another IndyMac," Mr. Dennis said. "They do not want CNN panning crowds lined up to try and get their deposits before the bank opens in the morning."

Since then the vast majority of the FDIC's receiverships have covered uninsured depositors, preventing the kind of fallout that results from customers losing money. Of the 20 banks that failed after IndyMac, 16 of the transactions fully covered uninsured customers.

Some observers raised questions that the FDIC had violated its statutory mandate to find the least costly resolution, arguing that while protecting all depositors may be in the public interest, it is not the law.

"The statute doesn't say anything about public confidence," said Bert Ely, an independent consultant based in Virginia and a critic of the agency. "I don't have a problem with protecting all depositors, but there ought to be an open debate about it."

But FDIC officials said protecting depositors was not their idea, but the result of the bidding process. Some observers said banks are more likely after IndyMac to seek to protect deposits for fear of starting a panic.

"If the bidders are willing to pay enough traditional money to pay the uninsured, then they're protected," said Art Murton, the director of the FDIC's division of insurance and research. "That's not something really we control. It's really a function of the value of the franchise, and how the bidders view it."

It is clear, however, that the FDIC has responded to failures more creatively since IndyMac.

The prime example was the Sept. 25 takeover of Washington Mutual.

The largest failure in history took down two thrift charters and involved $307 billion of assets and $188 billion of deposits, but it cost the Deposit Insurance Fund nothing.

The agency negotiated a deal to have all of Wamu's banking operations transferred to JPMorgan Chase & Co. and make all depositors whole. JPMorgan Chase paid $1.9 billion.

The agency has explored tactics beyond traditional failed-bank transactions to resolve other institutions, including coordinated closings and loss-sharing agreements with acquiring institutions.

On Nov. 21 regulators closed the $12.8 billion-asset Downey Savings and Loan and the $3.7 billion-asset PFF Bank and Trust, both Southern California thrifts, and maneuvered their sale to one bidder, U.S. Bancorp of Minneapolis. Under the deal, all depositors were covered. U.S. Bancorp's main subsidiary agreed to assume the first $1.6 billion of losses from loans tied to the deal, with the agency sharing in future losses.

Observers lauded the FDIC's strategies as failures have picked up, saying the agency has thought outside the box and allayed the fears of the banking public.

"As bad as everyone perceives the crisis, and it is horrible, if you surgically look at how the FDIC has handled the failures … the system works, and it works in the way it's supposed to work," said Frank C. Bonaventure Jr., a principal at Ober Kaler in Baltimore. "The FDIC has managed it pretty well, because the goal here is to keep public confidence up."

Prof. DeYoung agreed the FDIC has "become a lot more artful and flexible in the method in which they resolve insolvent banks."

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Corrected December 31, 2008 at 3:48PM: A previous version of the attached chart contained incorrect data about several institutions.