February 24, 2010
By ERIC DASH, New York Times
After weathering the nation’s worst run of bank failures in nearly two decades, the Federal Deposit Insurance Corporation announced Tuesday that it had added 450 institutions to its list of challenged lenders in 2009 and warned that the industry was likely to remain under stress.
The number of so-called problem banks rose to 702 at the end of 2009, compared to 252 at the beginning of the year. Both the number of troubled institutions and their total assets are at the highest level since 1993, putting enormous strain on the government-administered insurance fund that protects customer deposits.
The F.D.I.C. does not disclose which banks it considers at risk. Lenders on its list are not necessarily in imminent danger of failure.
With banks failing in growing numbers, the F.D.I.C. said its insurance fund fell deeper into the red, ending 2009 with a deficit of $20.9 billion. That position was nearly $38.1 billion weaker than a year earlier. The bulk of that decline reflects funds that the F.D.I.C. is setting aside to cope with future losses.
In its annual report on the banking industry, the agency suggested that many of the nation’s 8,100 lenders essentially broke even during 2009 but that many remained in fragile condition. Many smaller lenders, in particular, are struggling. Bad credit card, mortgage and corporate loans escalated in the final months of 2009 — the 12th consecutive quarterly increase — albeit at a slower pace. Fewer than a third of banks reported a net loss for the fourth quarter, which officials held out as a glimmer of good news.
“There is incremental improvement,” said Sheila C. Bair, the F.D.I.C. chairwoman, said in a news conference in Washington Tuesday morning. “We are seeing some encouraging signs here. Over all, the banking system is challenged but stable.”
Last week, the Federal Reserve raised the rate it charged banks for emergency loans, suggesting Fed officials believe that the overall industry has recovered from the worst days of the financial collapse. Federal regulators are also expected to withdraw several government support programs shortly. But with high unemployment levels and few signs the housing market has bottomed out, the broader outlook for many banks remains murky at best.
Collectively, banks posted a $914 million profit in the fourth quarter, compared with a $2.8 billion profit in the third quarter.
For all of 2009, the banking industry posted a $12.5 billion profit, far below the $100 billion in annual profits that the industry raked in two years earlier at the height of the boom. Although the financial industry benefited from ultra-low interest rates, most banks also faced record loan losses. Many midsize and community lenders, which do not have big trading businesses, suffered big losses last year. Officials worry that they will be reluctant to lend to small businesses and other customers until they replenish their coffers. “Large banks need to step up to the plate here,” Ms. Bair added.
The troubles may get worse in the coming months. Once the Fed starts tightening credit, banks will no longer be able to rely on the easy profits of the last two years to cushion their losses. The extra strain could cause dozens of additional banks to fail, just as similar interest-rate swings hurt many lenders after the saving-and-loan crisis.
So far, the F.D.I.C. has seized and sold about 20 banks in 2010, compared with 140 bank failures in 2009. That was the largest number of failures in 17 years. Analysts expect at least several hundred more small lenders to collapse over the next few years, a prospect that seems more likely given the surge in the number of problem institutions last year. The number of problem banks rose by 150 in the fourth quarter alone, bringing it to nearly 1 in 11 lenders.
That is putting significant pressure on the F.D.I.C. fund, which safeguards deposits. Banks pay premiums that insure individual accounts for up to $250,000, but the crushing load of bank failures last year left it severely depleted. The fund had a negative $8.2 billion balance at the end of the third quarter as it slipped into the red for the first time since the early 1990s, the agency said.
Since the bulk of the insurance fund’s losses stem from money previously set aside to cover future bank failures, it can continue to operate in the red. But the F.D.I.C. began taking steps to shore up the fund last year — and make up a projected $50 billion shortfall.
Last fall, officials ordered its thousands of member banks to begin prepaying their annual assessments, which would have otherwise been due through 2012. That move is expected to add about $45 billion to the insurance fund coffers. Officials have imposed a special assessment fee and have begun striking more loss-sharing agreements, which lowers the amount of cash the agency lays out up front.
Some analysts say they still believe that the agency may need additional cash. The F.D.I.C. has the ability to access an emergency line of credit from the Treasury Department if conditions worsen, though officials are reluctant to do so. Such a move would draw a spate of bad publicity and would run the risk of unnerving consumers.
In late August, Ms. Bair said she did not expect to have to tap that line of credit immediately, although she did not rule it out. “I never say never,” Ms. Bair said at the time.