For banks, good news on earnings but not risk of failure

By Phil Mattingly
Tuesday, August 31, 2010; 7:54 PM

Lenders posted their biggest quarterly profit in almost three years, even as the number of banks at risk of failure rose to 11 percent of insured institutions, the Federal Deposit Insurance Corp. said Tuesday.

Bank-industry profits totaled $21.6 billion in the three-month period that ended June 30, an increase from $18 billion in the first quarter, the FDIC said in its quarterly report on the industry's performance.

"The economic recovery that began last year is beginning to be reflected in the rising earnings and improving credit quality," FDIC Chairman Sheila C. Bair said at a briefing. "Given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves," she said.

As the largest banks show improvement in earnings and credit quality, the FDIC's "problem" bank list reached its highest level since 1992 amid slowing recovery from the worst economic crisis since the Great Depression, the agency said.

The confidential list had 829 banks with $403 billion in assets at the end of the second quarter, a 7 percent increase from the 775 included in the first quarter, the FDIC said.

Bair said her agency will move quickly to create an interim rule to guide resolutions of systemically important financial companies when they are on the brink of failure.

The FDIC will release a rule "fairly quickly, and then we will use that as the vehicle to solicit more comments," Bair said later Tuesday during a roundtable discussion with regulators, academics and executives from leading financial firms.

Regulators are closing banks at the fastest pace since 1992, seizing 118 lenders so far this year after shutting 140 institutions in 2009. Total assets held by troubled lenders fell from $431 billion in the first quarter, a reflection of the comparatively poor performance of smaller banks.

Overall lending fell 1.4 percent. Net loan and lease balances declined by $95.7 billion amid tighter lending standards and a decrease in consumer demand.

"The decrease in loans outstanding is not unexpected given the still weak economy and the regulatory uncertainty that has been hovering over the industry," American Bankers Association chief economist James Chessen said in a statement. "Businesses are still reluctant to take on new debt without having hard evidence that consumers are willing to buy their products."

The FDIC's deposit insurance fund, which fell into deficit as bank closings soared last year, dropped to a negative $15.2 billion balance in the second quarter from $20.7 billion in the first three months of 2010. The deficit has been reduced in each of the past two quarters after reaching a peak of $20.9 billion in the fourth quarter of 2009.

The agency last year required banks to prepay three years of deposit insurance premiums, raising $46 billion.

The agency also has the authority to tap a $500 billion credit line with the Treasury Department.

The FDIC insures deposits at 7,830 lenders with $13.2 trillion in assets. The insurance fund is used to reimburse customers for deposits of as much as $250,000 when a bank fails.

- Bloomberg News

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