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August 28, 2009
Bank Losses Drain Deposit Fund, F.D.I.C. Reports
By ERIC DASH
Even as financial stocks have
rallied nearly 60 percent since the end
of March, the Federal Deposit Insurance Corporation issued another
grim report
card Thursday on the health of the nation’s banks.
The agency reported that the banking industry lost $3.7 billion
in the
second quarter amid a surge in bad loans made to home builders,
commercial real estate developers, and small
and midsize businesses.
Its deposit insurance fund dropped 20 percent, to $10.4 billion, in
the second quarter,
its lowest level in nearly 16 years.
And the number of “problem banks” increased to 416, from 305 in the
first
quarter, and is expected to remain high, the F.D.I.C. said.
Indeed, federal officials warned that a rebound in the
banking sector
could lag an economic recovery by a year or more. “In many important
respects, financial markets
are returning to normal,” the F.D.I.C.
chairwoman, Sheila C. Bair, said. “Cleaning up balance sheets is a
painful
process that does take time, but it is absolutely necessary to
the industry’s sustained profitability.”
The
banking industry’s dismal report card shows how the troubles have
spread. Although a handful of the nation’s
biggest banks posted strong
profits from trading, most of the country’s 8,195 banks make
old-fashioned loans to
consumers and businesses. Analysts say they are
unlikely to see a rebound until well after the economy has stabilized.
So
far, 81 banks have failed this year, including 45 in the second
quarter. That, in turn, has put enormous stress on the
deposit
insurance fund as administered by the F.D.I.C. It has been drained to
$10.4 billion in the second quarter, compared
with $45.2 billion a
year earlier.
Still, the bulk of that decrease comes from additional money that the
agency
has set aside to cover the cost of bank failures. F.D.I.C.
officials will consider a second special assessment, on top
of
elevated insurance fees, toward the end of the third quarter to help
replenish the fund.
It added $9.1 billion
to the insurance fund in the second quarter from
higher deposit fees on banks, and it may be able to recover more money
by
selling assets from seized banks.
Ms. Bair said that she did not anticipate having to tap an emergency
credit line
run by the Treasury Department, although she did not rule
it out. “I never say never,” she said. The F.D.I.C.
quarterly report
card followed a similar release by the Office of Thrift Supervision on
Wednesday that showed savings
and loan associations eked out a $4
million profit, the first time the sector posted positive results
since the fall
of 2007. Still, the number of “problem thrifts” rose to
40, up from 17 a year earlier.
The savings and
loan industry “is not out of the woods yet,” John E.
Bowman, the acting director of the Office of Thrift Supervision.
“Despite
some encouraging signs, the industry’s performance remained
uneven.”
Federal banking regulators are
bracing for hundreds of small and
medium-size banks to collapse in the coming months even though the
economy has shown
early signs of rebounding. Banks are being saddled
with billions of dollars of bad loans made over the last few years and
are
continuing to set aside more money to cover losses. Until the
unemployment rate stabilizes, analysts do not see the pressure
on the
industry abating
Despite some improvement in the financial markets and broader economy,
credit loss rates
reached a record high in the second quarter. Over
all, banks charged off $48.9 billion, or 2.55 percent of assets, or
nearly
twice the levels the industry reported last year. The bulk of
that increase was tied to rising corporate and commercial
real estate
losses, as big write-offs on short-term debt and a surge in troubled
credit card loans. Bank profits were
also strained by sharp increases
in their deposit insurance fees as the F.D.I.C. moved to shore up its
fund.
Even
so, federal officials said there were some glimmers of good news.
The agency said lending margins had improved because
of the
government’s ultra-low interest rates. And the quarterly increase in
loan losses showed signs of slowing.
“We
will need another quarter to confirm that trend,” Ms. Bair said.
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