More than one in four banks insured by the Federal Deposit Insurance Corp. lost money during the second quarter, and the number of institutions on the government insurer’s "problem list" grew to 416 — the largest number in 15 years.
A total of 81 insured banks and institutions have already failed this year, and the FDIC’s Deposit Insurance Fund has dropped below the level mandated by Congress. That could force the FDIC to raise the fees banks pay for insurance coverage, or borrow money from the Treasury.
Deteriorating loan quality continues to be the greatest drag on the banking industry, which posted an aggregate loss of $3.7 billion for the quarter, a reversal from the $5.5 billion in profits banks eked out during the first quarter, the FDIC said in its Quarterly Banking Profile.
The industry as a whole has posted quarterly losses only twice in the last 18 years — most recently in the fourth quarter of 2008, when banks set aside massive reserves to cover future loan losses and wound up a cumulative $37.3 billion in the red. Before the housing downturn, the banking industry consistently posted quarterly profits of more than $30 billion.
The FDIC’s Deposit Insurance Fund decreased by 20 percent during the second quarter, to $10.4 billion, bringing the reserve ratio to 0.22 percent of insured deposits — the lowest level since March 1993, when the ratio was 0.06 percent.
Congress has mandated that the reserve ratio be maintained at 1.15 percent, but it slipped to 1.01 percent at the end of June 2008.
The FDIC has an additional $32 billion contingent loss reserve — money already set aside for expected bank failures — that it can draw on before dipping into the $10.4 billion Deposit Insurance Fund.
In addition to raising fees on banks, the FDIC can borrow up to $500 billion, so the decline in the fund balance "does not diminish our ability to protect insured depositors," FDIC Chairwoman Sheila Bair said in a press release.
There’s evidence that the U.S. economy is starting to grow again, Bair said, but the banking industry’s performance is a lagging indicator — meaning it will take longer to show improvement.
What’s your opinion? Leave your comments below or send a letter to the editor.