FDIC sees 117 problem banks; most since 2003
WASHINGTON (Reuters) - The number of troubled U.S. banks rose 30 percent to 117 in the second quarter, the highest level in five years, and a top regulator warned that conditions will worsen as the housing slump and credit crisis continues to pound profitability.
Federal Deposit Insurance Corp (FDIC) Chairman Sheila Bair said on Tuesday she 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 quarterly news conference, adding that U.S. banks will not return to high levels of earnings anytime soon.
"We expect that banks and thrifts will keep building up reserves for the next several quarters," Bair said.
The news initially pulled down financial shares before markets closed higher on the back of a surge in energy shares.
Nine U.S. banks have failed so far this year, including mortgage IndyMac Bancorp Inc IDMC.PK, which has drained the FDIC's Deposit Insurance Fund used to repay insured deposits at failed banks.
In a bid to replenish the $45.2 billion fund, Bair said the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.
The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said, to encourage safer business practices.
Charlie Peabody, a bank analyst at Portales Partners in New York, said such a weighted tax could hurt already troubled banks past the point of recovery. "The tax will fall most heavily on the weakest, so the conclusion is, the weak are going to get weaker and the strong will be able to take advantage of the weak," he said.
SHRINKING EARNINGS
The FDIC said the sector's earnings fell 86 percent from a year earlier to $5 billion in the second quarter, mainly due to a fourfold rise in provisions for bad loans to $50.2 billion. With the exception of the fourth quarter of 2007, industry profits 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, which became the third-largest U.S. bank failure in July. FDIC examiners closely monitor the watchlist but do not publicly release the names on it. Continued...
