FDIC says U.S. problem banks rise 30 pct to 117

By Karey Wutkowski

WASHINGTON (Reuters) - The number of troubled U.S. banks rose 30 percent to 117 in the second quarter, the highest level in five years, as the housing slump and worsening economy pounded profitability, a regulator said on Tuesday.

Federal Deposit Insurance Corp (FDIC) Chairman Sheila Bair expects more banks to join the agency's watchlist of problem banks, which tallies institutions with financial, operational or managerial weaknesses that threaten their financial viability.

"We don't think the credit cycle has bottomed out yet," Bair told a news conference, adding that U.S. banks will not return to high levels of earnings any time soon.

The news initially pulled down financial shares before markets closed higher after a boost in oil prices.

Bair said the FDIC will consider a plan in October to require banks that engage in high-risk behavior to contribute more to the agency's dwindling Deposit Insurance Fund, which it uses to repay insured deposits at failed banks.

"The higher premiums will be high enough to provide incentives to decrease their higher risk activities," Bair said.

The FDIC said the banking sector's earnings fell 86 percent from a year earlier to $5 billion in the second quarter due to a fourfold increase in provisions for bad loans. With the exception of the fourth quarter of 2007, the industry's earnings were the lowest since the fourth quarter of 1991.

"The numbers are alarming, but we are coming off of an incredibly low base of problem institutions and failures," said Mike Stevens, senior vice president for regulatory policy at the Conference of State Bank Supervisors.

"This is nowhere near what we had seen during prior periods of weakness. Are we done? I don't think anyone would predict that. We have a ways to go."

The FDIC said the combined assets of the 117 problem banks increased to $78 billion from $26 billion in assets at 90 banks in the first quarter. Bair has said that historically 13 percent of banks on the watchlist fail.

The latest figure included $32 billion of assets from IndyMac Bancorp Inc IDMC.PK, which became the third-largest U.S. bank failure in July. Nine banks have failed so far this year. FDIC examiners closely monitor the watchlist but do not publicly release the names on it.

Bair said 98 percent of U.S. banks continue to be well-capitalized. She also noted that the banking sector's exposure to mortgage giants Fannie Mae and Freddie Mac's preferred securities is "not problematic" but said some smaller institutions could be under stress.

The housing slump, worsening economic conditions and the overall downturn in the credit cycle forced U.S. banks to set aside $50.2 billion in loan loss provisions during the second quarter, the FDIC said in its quarterly industry update.

That figure is more than four times the $11.4 billion that the industry set aside in the second quarter last year.

The FDIC's Deposit Insurance Fund fell to $45.2 billion at the end of the second quarter from $52.8 billion at the end of the first quarter due to IndyMac and other bank failures.