FDIC List of Problem Banks Jumps 36 Percent, to 416 Institutions

By Binyamin Appelbaum
Washington Post Staff Writer
Friday, August 28, 2009

The federal agency that repays depositors at failed banks said Thursday that cleanup costs reduced its insurance fund to $10.4 billion at the end of June, the lowest level since the early 1990s, and that many surviving banks face mounting problems.

The decline in the Federal Deposit Insurance Corp. fund increases pressure on those banks because they pay fees to cover the cost of failures, but it does not threaten the safety of accounts in failed banks. The government ultimately guarantees it will protect depositors.

The FDIC said banks lost a total of $3.7 billion in the second quarter as growing numbers of borrowers failed to repay existing loans. In response, the industry continued to reduce the volume of its new lending, a major impediment to renewed economic growth.

Even as the broader economy shows some signs of recovery, much of the banking industry -- particularly smaller banks that have received less support from the federal government -- continues to struggle, FDIC Chairman Sheila C. Bair said Thursday.

"The difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line," Bair said. "These credit problems will outlast the recession by at least a couple of quarters."

The problems are claiming a growing number of banks. Regulators seized 45 firms during the first half of the year. In the past two months they have closed 36 more, including regional powerhouses Colonial Bank of Alabama and Guaranty Bank of Texas. The FDIC said Thursday that it counted 416 banks at risk of failing as of the end of June, a 36 percent increase from the first quarter. As with the cost of failures, the number was the highest since the early 1990s, when regulators were dealing with the aftermath of the savings and loan crisis and excessive lending for commercial development.

In recent quarters, the failures have forced the FDIC to spend more money than it collects. Banks use money from depositors to make loans. As a result, when a bank fails, much of the depositors' money is no longer in the vaults, and some of it is tied up in loans that will never be repaid. The FDIC was created by Congress to replace the missing money -- up to $250,000 in each account, under current rules.

The insurance fund held $45.2 billion at the end of June 2008. It held $13 billion at the end of March. The agency has warned that the balance could reach zero by the end of the year.

The situation is not as bleak as it seems, however. The agency already has set aside $32 billion to cover the cost of expected failures over the next year. The $10.4 billion balance reported Thursday is additional and meant to cover losses above the agency's projections.

Furthermore, the FDIC continues to collect money from the industry. The agency has already imposed a special assessment in addition to quarterly fees and has signaled that it is likely to do so again by the end of the year.

Should the FDIC need even more money, the agency can borrow from the Treasury Department, then repay the government with fees collected from banks in years to come.

Bair has said that she believes banks should carry the load without help from the Treasury, and she reiterated Thursday that she did not expect the FDIC to seek a taxpayer-funded loan, although she cautioned, "I never say never."

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