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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