The Federal Deposit Insurance Corporation (FDIC), the agency charged with safeguarding the financial security of bank deposits, announced on Tuesday that the nation's banks are sick and the prognosis is not good.
The FDIC insures the deposits of banking customers to $100,000 per depositor in the case of a bank failure and plays a major role in regulating those banks to avoid losses; closing banks found to be insolvent, and managing the liquidation of those banks' assets.
So far this year the FDIC has taken nine institutions into receivership, more than three times the number closed since 2004 and is now warning that its watch list of troubled banks has grown to 117 from 90 at the end of the first quarter of 2008.
Insured banks reported net income of $5 billion in the second quarter of 2008, a decline of $31.8 billion (86.5 percent) from earnings in the second quarter of 2007. These were the second lowest earnings (after the fourth quarter of 1991) and 117 is the largest number of banks on the troubled list since 2003. Assets in those banks increased from $26 billion to $78 billion, however, $32 billion of that was from IndyMac Bank which was shuttered by the FDIC in July.
Sheila C. Bair, chairman of the FDIC said, "By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, the housing slump, worsening economic conditions, and the overall downturn in the credit cycle."
Higher provisions for loan losses were cited as the primary reason for the drop in industry profit. These provisions totaled $50.2 billion during the quarter, a four-fold increase over such provisions one year earlier. Rising levels of troubled loans, particularly related to real estate, were responsible for much of the increase. While more than half of all FDIC insured institutions reported a decline in net income during the second quarter, the bulk of the change could be attributed to a few big banks.
Non-performing, i.e. delinquent loans and leases increased by $26.7 billion during the second quarter on the heels of increases of 26.2 billion and 27 billion in the first quarter of 2008 and the fourth quarter of 2007 respectively. Most of these non-current assets were real estate related, but all major loan categories were affected.
The FDIC press release cited other troubling signs of financial ill health; the assets of insured institutions declined by $68.6 billion because of falling funds in trading accounts, a decline in bank holdings of one-to-four family residential mortgage loans and fewer real estate construction and development loans.
The FDIC's Deposit Insurance Fund reserve ratio fell to $45.2 billion, down from $52.8 billion at the end of Quarter One, causing the reserve ratio to fall to 1.01 percent from 1.19 percent. Because of this drop the FDIC Reform Act of 2005 requires the FDIC to develop a restoration plan that will raise the reserve ratio to at least 1.15 percent within five years.
Ms. Bair announced that in early October the Corporation will consider a plan to replenish the Fund and that this will likely include an increase in the premium rates with which the banks support the Fund. She said that proposed changes will involve shifting a greater share of any increase onto those institutions that engage in the riskiest behavior.