Worsening Credit Markets Cause More Banks To Fail

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Customers line up at an IndyMac branch in California. i

Customers line up to retrieve their deposits from an IndyMac branch in Santa Monica, Calif., in mid-July. Gabriel Bouys/AFP/Getty Images hide caption

toggle caption Gabriel Bouys/AFP/Getty Images
Customers line up at an IndyMac branch in California.

Customers line up to retrieve their deposits from an IndyMac branch in Santa Monica, Calif., in mid-July.

Gabriel Bouys/AFP/Getty Images

What do you do if your bank fails? The FDIC has some answers.

An increasing number of federally insured banks are on the government's "problem" list as a result of the worsening credit crisis in the United States.

The Federal Deposit Insurance Corp. said on Wednesday that 117 banks and saving institutions were now on the list — the highest number since 2003. At the end of the first quarter of 2008 there were 90.

"More banks will come on the list as credit problems worsen," says FDIC Chairwoman Sheila Bair. Earlier this year, Bair said about 13 percent of the banks on the list typically fail.

In July, the collapse of California-based IndyMac, which the FDIC had to bail out because of the excessive number of risky mortgage loans it made, heightened fears that more bank failures were on the horizon. So far, nine banks have failed in 2008.

The second quarter represented one of the worst periods for bank earnings since 1991, according to the FDIC, which issued its statistics as part of a second-quarter banking report.

Net income for commercial banks and savings institutions was $5 billion for the second quarter, a decline of nearly 87 percent. Last year, the industry reported income of $36.8 billion.

Nearly 18 percent of the 8,400 insured banks were "unprofitable" in the second quarter, almost double the percentage for the same period a year ago. The decline in earnings was largely due to increased expenses from credit losses, says Bair.

Although earnings were "pretty dismal," Bair said most institutions were fundamentally sound. But because of the rapid rate at which loans are going bad, Bair says the FDIC continues to "strongly encourage" banks to have the necessary reserves to cover any credit losses.

"The problems have been focused particularly on the construction and land development loans, and that's not a surprise," says James Chessen, chief economist for the American Bankers Association. He says the FDIC has had a "high rate of success in nursing" troubled institutions back to health.

Bair says the outlook for residential mortgage loans continues to deteriorate: They "account for the largest share of the increase" in troubled loans. Construction loans, however, are the fastest-growing category of troubled loans, she notes.

Although the largest banks on Wall Street were the first to incur losses from housing-related securities that went south, other smaller banks are not immune. Regional banks remain mostly affected by residential construction loans — not residential mortgages — says Erik Oja, a banking analyst for Standard & Poor's equity research.

"Up to 10 percent of these loans will go bad," says Oja. That's especially the case, he adds, for banks doing business in the "four worst states for housing price declines" — Arizona, California, Florida and Nevada.

Compiled from NPR staff reports.



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