F.D.I.C. Says Many Small Lenders Are Still at Risk

Posted on Wednesday, December 1, 2010

Even as the nation’s biggest banks have rapidly recovered, hundreds of small lenders remain at risk, according to the government’s latest report card on the financial industry.
The Federal Deposit Insurance Corporation said on Tuesday that its list of “problem banks” — those with the highest risk of failing — had grown to 860, or nearly one in nine lenders. Most are small community banks, saddled with bad real estate loans.
Not all of the banks are destined to fail, but officials reiterated that they expected the number to peak later this year. The agency has shuttered more than 149 banks in 2010, with about 41 closing in the third quarter.
Bank earnings, meanwhile, continue to rebound as losses appear to be stabilizing. The nation’s 7,760 banks made about $14.5 billion in profit in the third quarter, the F.D.I.C. reported. That was about $2 billion higher than a year ago, although down sharply from the last two quarters as a result of a $10.1 billion loss from Bank of America. Nearly two in three banks posted an improvement in quarterly results.
It was the fifth consecutive period that earnings had registered a year-over-year increase.
Fewer borrowers are falling behind on their loan payments, giving banks confidence to set aside the lowest amount of money since the credit crisis gathered steam in late 2007. And for a second consecutive period, the banks charged off fewer loans in nearly every category. Nearly two in three banks showed an improvement in their results this quarter.
Lending, however, remains weak. Total loans and leases were essentially flat from a year ago. And with the economy still fragile, many bankers do not expect a sharp increase anytime soon.
Still, Sheila C. Bair, the F.D.I.C. chairwoman, said that she was cautiously optimistic about her outlook for the nation’s banks. “The industry has come a long way in cleaning up balance sheets, building capital, and adjusting to changes in financial markets and the economy,” she said. “But the adjustments are not over, and this is no time for complacency.”
But Ms. Bair warned the industry against getting ahead of itself by reducing the reserves it had previously set aside to cushion against losses. While almost 60 percent of the nation’s banks increased their reserves in the third quarter, nine out of the 10 largest institutions sharply lowered them.
“At this point in the credit cycle, it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and loss rates,” Ms. Bair said in the statement. “When it comes to the adequacy of reserves, institutions should always err on the side of caution.”
Regulators have cited the banks’ ultrathin reserves in the early days of the financial crisis as a major factor exacerbating the industry’s troubles, and are eager to avoid a repeat. The nation’s 19 biggest banks are undergoing a new round of stress tests to determine their ability to absorb losses during a protracted downturn.
With so many banks failing, the deposit insurance fund has been severely depleted. At the end of September, it carried a negative balance of $8 billion, up from a negative balance of $15.2 billion in the second quarter. The insurance fund is in better shape than such numbers might suggest, however.
Officials have estimated that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, about $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.
F.D.I.C. officials said they hoped to recoup the costs through higher premium fees and a special assessment imposed last September. Still, Ms. Bair said the agency had ample resources.
“While we expect demands on cash to continue,” Ms. Bair said, the F.D.I.C.’s projection indicated that current resources were more than enough to resolve anticipated failures and meet obligations for banks that had already failed.

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