FDIC Fund Shrinks Amid Rising Bank Failures

MagnetBank office in Salt Lake City i i

FDIC, bank personnel and a sheriff deputy work inside the corporate office of MagnetBank in Salt Lake City on Feb. 2. The bank is one of those taken over by the FDIC. Douglas C. Pizac/AP hide caption

itoggle caption Douglas C. Pizac/AP
MagnetBank office in Salt Lake City

FDIC, bank personnel and a sheriff deputy work inside the corporate office of MagnetBank in Salt Lake City on Feb. 2. The bank is one of those taken over by the FDIC.

Douglas C. Pizac/AP

Rising unemployment and loan defaults have caused 81 banks to fail this year, and the failures are sapping the insurance fund of the FDIC, a banking official said Thursday.

The government fund that protects most bank deposits fell 20 percent to just $10.4 billion in the second quarter, Federal Deposit Insurance Corp. Chairman Sheila Bair said at a news conference.

Bair said U.S. banks lost $3.7 billion during the second quarter mostly because of costs associated with rising levels of bad loans and falling asset values. By contrast, banks saw profits of $7.6 billion during the first quarter, and they had a net profit of $4.8 billion in last year's second quarter.

Still, Bair said the FDIC is not currently contemplating borrowing money from the Treasury to boost the deposit insurance fund.

"I never say never, but not at this point in time, no," she said.

Troubled Banks Increase

The list of problem banks rose from 305 to 416 from the first quarter to the end of June — the most in 15 years. The troubled banks had nearly $300 billion in assets. FDIC-insured banks and thrifts had aggregate net losses of $3.7 billion.

Bair acknowledged that "challenges remain," but she said there is evidence that the economy is starting to grow. Stressing that banking industry performance is "a lagging indicator," Bair said the banking sector can look forward to better times ahead.

Until then, the FDIC is going through the process of recognizing loan losses and cleaning up balance sheets.

The FDIC said nearly 66 percent of banks and savings and loans reported earnings below those in the second quarter of 2008, and more than a quarter of institutions posted a net loss.

The 8,195 federally insured banks and thrifts set aside $66.9 billion in the second quarter to cover potential loan losses, up from $60.9 billion a year earlier. Analysts have warned that failing financial institutions could leave the FDIC's insurance fund so depleted that it could fall into the red by the end of the year.

That has happened only once before — during the savings and loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury.

Small and midsize banks nationwide have been hurt by rising loan defaults in the recession. When they fail, the FDIC is responsible for making sure depositors don't lose money.

It has two options to replenish the insurance fund in the short run: charge banks higher fees or borrow from the Treasury.

Special Assessment Option

Bair said the FDIC had not yet decided whether to charge banks another special assessment to replenish the fund, but she said the agency's board would meet toward the end of the third quarter to discuss the issue.

In May the FDIC voted to impose a $5.6 billion special fee the industry has to pay in the third quarter. It also gave itself the right to charge two more special fees in coming quarters.

None of this means bank customers have anything to worry about. The FDIC is fully backed by the government, which means depositors' accounts are guaranteed up to $250,000 per account. And it still has billions in loss reserves apart from the insurance fund.

Because of the surging bank failures, the FDIC's board voted Wednesday to make it easier for private investors to buy failed financial institutions.

Private equity funds have been criticized for taking too many risks and paying managers too much. But these days fewer healthy banks are willing to buy ailing banks, and the depth of the banking crisis appears to have softened the FDIC's resistance to private buyers.

From NPR staff and wire reports

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