August 31, 2010
By ERIC DASH, New York Times
Even as the economy remains weak and the number of troubled banks creeps higher, the Federal Deposit Insurance Corporation’s quarterly report card on Tuesday showed that the banking sector is slowly starting to recover.
Agency officials said the list of “problem banks” reached 829 in the second quarter, an increase of 54 lenders, many of which were small community banks. While that is a smaller increase than in previous quarters, the number of problem banks remains at its highest level in more than 16 years.
Not all of those banks are destined to founder, but officials reiterated that they expected the number of failures to continue to rise modestly before peaking later this year. So far this year, 118 banks have failed, with 45 closing in the second quarter.
Even so, bank earnings continue to rebound. The banking industry posted a $21.6 billion profit in the second quarter as loan losses stabilized, the report card said. That profit reversed a $4.4 billion loss a year earlier, and it was the industry’s best results since the credit crisis began in the third quarter in 2007.
The stronger performance reflected that banks are also setting aside less money to cover future losses than they were before and taking advantage of ultralow interest rates to improve lending margins.
Fewer borrowers are falling behind on their loan payments, too. Across nearly every category, troubled loans started falling for the first time in more than four years. The exception was commercial real estate loans, which continued to show weakness.
“The industry has stopped the bleeding, but has not recovered from the wounds,” Jaret Seiberg, a financial policy analyst, wrote in a research note on Tuesday morning.
Those glimmers of stability have attracted private investors who believe they finally have a handle on the depth of the banks’ problems. Investment bankers, meanwhile, are setting their sights on a flurry of small bank deals in 2011.
Still, the nation’s 7,830 banks remain under pressure. The F.D.I.C.’s quarterly report hinted at early signs of strain from the new financial regulations as bank cut back on fees ahead of the new legislation.
Fees attached to deposit accounts, for example, amounted to $752 million, about 7.1 percent lower than a year earlier. Lending, meanwhile, showed signs of continued weakness. Total assets for the banking industry fell about 1 percent, amid declines in every major lending category.
Although other government reports suggest that banks may be starting to loosen some of their lending standards, a lingering unemployment rate and general nervousness about the economy has crippled demand for new loans. Commercial real estate loan balances fell 8.3 percent in the second quarter, while credit card balances declined by about 2.5 percent.
Sheila C. Bair, the F.D.I.C. chairwoman, warned that the recovery of the banking industry could be hampered by protracted weakness in the economy.
“Without question, the industry still faces challenges,” she said in a written statement. “But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction.”
The agency expects a “recovery, sluggish and slow,” Ms. Bair said.
With so many banks failing, the agency’s deposit insurance fund has been severely depleted. At the end of June, it carried a negative balance of $15.2 billion. The insurance fund is in better shape than those numbers might suggest, however.
Officials have estimated that bank failures will drain about $100 billion from the fund from 2009 through 2013. Of that amount, however, roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.
F.D.I.C. officials said they hoped to recoup those costs through higher premium fees paid by banks and through a special assessment imposed last September. Still, Ms. Bair said the agency had ample resources.
“As we expected, demands on cash have increased this year,” she said. “But our projections indicate that our current resources are more than enough to resolve anticipated failures.”