U.S. problem bank list hits 416, insurance fund falls
The number of problem U.S. banks and thrifts on an official watchlist rose sharply to 416 in the second quarter of 2009 from 305 in the prior quarter, as the industry recorded a $3.7 billion loss.
The Federal Deposit Insurance Corp said on Thursday that the industry swung back to a loss in the second quarter after reporting a $7.6 billion profit in the first quarter, primarily due to costs associated with rising levels of bad loans and falling asset values.
The agency's insurance fund used to safeguard bank deposits dipped 20 percent in the second quarter to $10.4 billion from $13 billion at the end of the first quarter. The decrease in the fund was chiefly caused by an $11.6 billion increase in the money the FDIC set aside for anticipated bank failures.
Nevertheless, FDIC Chairman Sheila Bair said there were signs of economic revival even as the banking industry struggled.
While challenges remain, evidence is building that the U.S. economy is starting to grow again, Bair said in a statement. Banking industry performance is -- as always -- a lagging indicator.
Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007.
We expect the numbers of problem banks and failures will remain elevated, even as the economy begins to recover, said Bair.
Despite the low insurance fund balance, Bair said the FDIC does not expect to have to tap its $500 billion line of credit with the U.S. Treasury Department at this time.
She also said the FDIC had not yet decided whether to charge banks another special assessment to replenish the fund, but said the agency's board would meet toward the end of the third quarter to discuss the issue.
The FDIC has been already been collecting a special fee in the third quarter that totals more than $5 billion, and is authorized to charge two more special fees.
The combined assets of problem institutions rose to $299.8 billion from $220 billion. Problem banks are troubled institutions whose regulatory rating has been downgraded due to issues related to liquidity, capital levels, or asset quality.
PROBLEMS TO CONTINUE
Bill Fitzpatrick, analyst at Optique Capital Management, said he expects the number of problem banks will keep rising.
These are smaller institutions but they hold a lot of commercial real estate loans and that market will continue to deteriorate, Fitzpatrick said.
Keefe, Bruyette & Woods analyst Jefferson Harralson saidconstruction loan losses related to residential real estate and development were depressing banks.
These numbers were fairly expected, and I expect we'll continue to see losses in construction, Harralson said.
The FDIC's second quarter briefing comes a day after the agency approved new rules on private equity investment in troubled banks, softening an initial proposal that critics had warned could scare away badly needed capital.
The FDIC reported on Thursday that more than one out of four U.S. banks was unprofitable during the second quarter.
The losses came as the industry set aside more money to cover costs associated with deteriorating loans. The bank industry's reserves for loan losses increased by 8.6 percent to $66.9 billion during the second quarter.
However, the industry did show some improvement. Net interest margins, or a bank's cost of funding, improved at a majority of institutions.
Overall capital levels also improved. The industry reported that on average, the leverage capital ratio increased during the quarter to 8.25 percent from 8.02 percent.
The combined assets of problem institutions rose to $299.8 billion from $220 billion. Problem banks are troubled institutions whose regulatory rating has been downgraded due to issues related to liquidity, capital levels, or asset quality.
(Reporting by Karey Wutkowski and Steve Eder; Additional reporting by Joe Rauch and Elinor Comlay in New York; Editing by Tim Dobbyn)
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