Correction to This Article
This article inaccurately described the action Wachovia said it was taking to shore up its loan loss reserves. The bank did not say it was raising new capital. Wachovia said it was setting aside money for its reserves and would report a second-quarter loss of $2.6 billion to $2.8 billion.

Wachovia Faces Shallow Reserves but Says It Is Setting Aside More Capital

Federal Reserve Chairman Ben Bernanke says the fragile economy is facing "numerous difficulties" including persistent strains in financial markets, rising joblessness and housing problems. Video by AP
By David Cho and Renae Merle
Washington Post Staff Writers
Wednesday, July 16, 2008

Wachovia's stock fell to a 17-year low yesterday after an analyst warned that the commercial bank, which holds more deposits than any other in the Washington region, will face two years of losses arising from the credit crisis and a dramatic restatement of troubled assets on its books.

The amount of the bank's bad loans is growing faster than what the company is stashing away, and its reserves are markedly lower than the industry average, according to bank officials and regulators. Wachovia has enough money to cover about 84 percent of its non-performing loans, the bank said yesterday.

As fears mount over the health of the nation's banking system, Wachovia will have to take exceptional steps to raise enough capital to meet its obligations, analysts said. This does not mean that the bank will fail anytime soon or that depositors face imminent danger.

"Wachovia is a fundamentally strong and stable company on solid footing . . . and is well-capitalized," said spokeswoman Christy Phillips-Brown.

Company officials disclosed yesterday that the bank was setting aside money to add $4.2 billion to its reserves and $1.3 billion more to cover losses in the second quarter. Those sums are in the same league as the provisions made by the biggest banks in the country to cover losses due to the credit crisis.

Such problems are not unique to Wachovia. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said she had seen "slippage" among loss reserves across the banking system.

Yesterday, Bair, President Bush and other senior regulators made a concerted effort to reassure people that their money is safe and that the nation's banking system is sound. Noting that the vast majority of banks remain well-capitalized, Bair said it had been an "uphill battle" to counter false rumors and restore calm among investors and bank customers.

"This is not a serious situation. I would call it challenging, increasingly challenging," she said in an interview. "We've had five bank failures this year. That is not huge. . . . I don't want to overreact or underreact, but let's get the facts. We are at a very low level of failures compared to previous cycles of economic distress."

Federal Reserve Chairman Ben S. Bernanke offered similar assurances during testimony yesterday before the Senate Banking Committee. "Our banking system is well-capitalized. It came in with strong capital. We are watching the situation very carefully," he said.

Despite the efforts by regulators, tensions remained high on Wall Street and Main Street. The Dow Jones industrial average closed below 11,000 for the first time in two years, losing 92.65 points, or 0.8 percent, to end the day at 10,962.54. The broader Standard & Poor's 500-stock index fell 13.39 points, or 1.1 percent, to close at 1214.91.

Shares of Bank of America, which recently completed its acquisition of mortgage lender Countrywide Financial, lost 8.1 percent in trading yesterday. National City, an Ohio-based bank whose shares have taken a recent beating, was down 4.5 percent. U.S. Bancorp, Minnesota's biggest bank, said that its second-quarter earnings fell 18 percent and that its level of bad loans would continue to rise as more customers fell behind on payments. Its shares dropped as much as 12 percent before recovering to end the day slightly in the red.

The S&P banking index was down 5.4 percent yesterday and 14 percent since Friday. "There continues to be a number of people who are worried about the health of the financial system, and they are putting pressure on financial stocks," said Andy Brooks, head of stock trading at T. Rowe Price.

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