Number of 'problem' banks jumps 30%, FDIC says

The Federal Deposit Insurance Corp.’s latest quarterly report on U.S. banks paints a picture of an industry under serious stress.

Some of the highlights from the report released today, covering 8,451 banks:

--- The number of institutions on the FDIC's "problem list" rose to 117 at the end of June from 90 at the end of March, a 30% increase. More worrisome for the FDIC, assets of the problem banks rose to $78.3 billion from $26.3 billion, a 200% jump. The data include IndyMac Bancorp, which had $32 billion in assets when it failed in July.

"More banks will come on the list as credit problems worsen," FDIC Chairwoman Sheila Bair said at a news conference in Washington.

The FDIC doesn't release the names of the banks on its list, which is based on a 1-to-5 rating system that judges capital levels, earnings power, management strength and other factors. If a troubled institution can't fix its problems or sell itself -- and becomes insolvent -- the FDIC takes control. The government has seized nine insolvent banks this year, including IndyMac.

--- As banks set aside $50.2 billion in the second quarter to cover potential loan losses, the industry’s total earnings dived to $5 billion in the period, down 86% from a year earlier and the lowest quarterly total since 1991. The plunge in earnings has caused many banks to slash dividend payments to shareholders.

--- At the end of June, the percentage of the industry's total loans that were 90 days or more past due was 2.04%, up from 1.39% at the start of the year and the highest level since the third quarter of 1993. The percentage has risen for nine straight quarters.

--- In one example of how the credit crunch may be filtering down, the total of bank loans outstanding to small businesses and farms rose just 3.4% in the 12 months ended June 30, compared with a 7.9% rise in the previous 12 months.

--- Total assets of FDIC-insured banks fell by $68.6 billion during the quarter, the first time the total has declined since the first quarter of 2002. "The reduction in assets was driven by a few large institutions, although almost 40% of all insured institutions reported lower assets at the end of June compared to the end of March," the FDIC said.

Bottom line: The banking business is shrinking, and that process isn’t likely to halt any time soon. And a shrinking banking industry will make it harder for the economy to get back on a decent growth track, because credit is the lifeblood of the economy.

Photo: FDIC Chairwoman Sheila Bair. Chip Somodevilla / Getty Images

Comments

[Arthur Lee]

Good article, but it would have been helpful to know the precise definition of a "problem bank."

[Tom Petruno]

Arthur: Good point. I added a sentence to the post noting that the FDIC has a private 1-to-5 rating system for banks. Any bank rated 4 or 5 usually joins the problem-bank list.
Tom Petruno (your blogger)

[Joe]

Tom, odd the feds seem fit to yell "fire", without telling you where. Seems a monthly or quarterly public listing would pressure those banks to be more transparent with depositors. Then the Schumers of the world would have no ammunition. If depositors had known Indy was about to fold, they could have (rightly) reacted sooner, removing uninsured funds. One could view it like the airlines having an FAA report card for safety, but not being told which airlines failed. It stands to reason that greater transparency leads to better decisions, and ultimately fewer public-paid bailouts of depositors.

[martscan]

Can a case be made for requiring regulatory agencies to divulge the CAMEL rating of banks? While the purpose of the secrecy of "problem list" banks is logical, to prevent a run, do not depositors, stakeholders, citizens if you will, have a right to know the health condition of their bank...as determined by THEIR goverment? It is one thing for the average bank customer, Joe 6-pack, to conscientiously attempt to decipher a financial institution's financial statement, to parse scheduled items, loan loss reserves, capital requirements, etc...and quite another to wake up some morning to read that their bank has failed. Additionally, with the publicity given the number of problem banks, obviously ominous, do not financially healthy, well managed banks suffer to some degree in a perceived "guilt by association", and simply by not knowing which are the problem banks in the mind of the public? These non-disclosure rules were instituted as a result of the Depression...but there is no comparison with then and now. I believe more banks, some 9,000, failed during the Depression than we now have, totally, in the country, and the banking system's money supply and credit were backed by gold. Inasmuch as those conditions prevalent in the 1930s are no longer extant, I believe the secrecy of the "problem list" should follow suit.

[Joe G]

Please, the FDIC's list is worthless. Wamu alone has over $300 billion in assets and its stock has declined 90% in the last year, yet it is not on the list. What does the stock market know that the FDIC apparently doesn't?

[Bill]

Stay away from CitiBank, they are lying thieves from NYC who screw you at every turn and close branch banks, such as the one in Studio City, at 4 pm. I had to go back the next morning and put my thumbprint on the bounced check before they would turn loose of MY cash. NEVER AGAIN !

[hippynate]

I've been having nightmares about the revocation of Glass Steagel. I wonder how much of the last 15 years would have been different without that wonderful move. One fewer housing bubble, one fewer tech bubble, one fewer tech crash and one fewer housing crash. Anyone ever read Aesop, the tortoise wins...

[Tom Petruno]

Joe: I can't disagree with your reasoning. But the FDIC reckons that the minute they'd publish the names of the banks on the list, all of those banks would be dead -- because deposits would pour out, and other banks wouldn't lend to them. The FDIC notes that just because a bank is a "problem" doesn't mean it is marked for failure. Management might well be able to turn the business around. The FDIC figures it's worth the effort, as opposed to making failure a certainty and thereby guaranteeing more drainage of the insurance fund (and, potentially, the U.S. Treasury).

Tom Petruno

[martscan]

Tom,

We are all familiar with the reasons for not divulging the list of problem banks. In the interest of protecting the public 75 years ago, it was a sensible ruling. Today, IMO, we are no longer on the gold standard...the monetary and credit systems of the country bear no resemblance to the financial system of 75 years ago and even Greenspan, in his wildest revisionary dreams, would be hard pressed to replicate the failure of 9,000 banks..in fact, it would be impossible since we don't have that many banks. But consider a scenario that mandated once banks reached a CAMEL rating of say, 3, they would be placed on a warning list...and it would be published in the WSJ...by law, along with a list of 4s and 5s, the dates of their inclusion in the various ratings and their improvements. Would not bankers strive, break their butts, to correct their flaws, right their ships, take drastic measures or do whatever it would take to stay off even the "3 list" and avert the financial and the public's perceptive stigma...long before any dough was lost at taxpayer expense? And, once the banking community and the public realized that a 3 or 4 rating, while it put everyone involved on notice, rightfully so, was not necessarily doom...it would force banks to be more prudent, weed out the inefficient, mismanaged banks and reward the efficient banks...all in the interest of protecting the public's money...the original intent of banking regulation. As it is now, regulatory agencies are actually shielding lousily run banks that have collectively succumbed to greed, and the taxpayers are now paying for their sins. The cost of Billionaire Socialism, contrary to the tenets of capitalism which they ballyhoo, in this country...from Wall Street to the oil patches to banks to farms to university labs doing research for private companies and on and on is staggering...its time for it to stop...and let it begin with the banks. Let them fail before the taxpayers have to pay for it.

[martscan]

For people wondering about the financial condition of their bank, while the government won't tell you, several private sources will, for a fee. Some of the more popular firms that provide analytical ratings and assessments are: A.M. Best, Bankrate, Inc., Bauer Financial, Inc., Financial Information Services, LLC, Highline Financial LLC. Their methodologies differ but all encompass deposits, earnings, balance sheet strength, capitalization, debt ratings, credit reports, etc, etc. Fees vary depending on the extent of information provided, but a fairly comprehensive report can be had for less than $100.

[Maggie Knowles]

Martscan, thanks for the information. If five of us got together at $20 each, we could share the report.

[martscan]

Joe G: How do you know Washington Mutual is not on the problem list? What is the source of your information? Can you share this with us?

Maggie: Yes, of course, you can share and divvy up the cost...but all of you would have to be interested in the same bank for the ante to be equitable.

[Debra]

here is a good website. It lists the problem banks to stay away from
also
http://www.bauerfinancial.com/cdratewatch.asp