'Marketplace' Report: Broke Banks

The number of shaky U.S. banks is at the highest level in about five years and bank profits plunged by 86 percent in the second quarter according to the Federal Deposit Insurance Corporation. Madeleine Brand talks to Marketplace's Bob Moon about how to keep your money safe.

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MADELEINE BRAND, host:

From NPR News, this is Day to Day. Profits in the banking industry are plunging. Now, there's word that the FDIC, that's the institution that insures banks, may need some help of its own. Marketplace's Bob Moon is here now. Bob, first tell us about these latest law suits for the banks. How bad is it?

BOB MOON: Well, Madeleine, this is the way the head of the Federal Deposit Insurance Corporation put it at her news conference. Quite frankly, the results were pretty dismal. Well, that may be an understatement. She was talking about the banking industry, which saw profits plunge 86 percent in the most recent quarter of the year.

Now today, we have this data from the U.S. office of thrift supervision that shows savings and loans lost 5.4 billion dollars in the second quarter, and they set aside a record amount, 14 billion dollars, to cover expected losses from bad mortgage and other loans. The FDIC reported yesterday that, combined, banks and thrifts it insures did set aside more than 50 billion dollars to cover losses, and that's also a record. By way of comparison, these thrifts that reported those losses of more than 5 billion dollars were in the reg of 627 million dollars during the previous quarter, and a year ago, they were reporting net profits of nearly 4 billion dollars.

BRAND: So a startling turnaround. Any sign, though, that this is the bottom, and that things might be improving?

MOON: So far, nine U.S. banks have failed this year, and most analysts don't see any indication that either the housing market or the credit crisis have hit bottom yet. In fact, there's a respected company based in the U.K., it's called Begbies Traynor. It specializes in insolvency issues and corporate rescue and recovery, and that firm has just issued a research note suggesting there could be - get this, an average of 100 small banks failing in the U.S. each year for the next three years, and their note calls that far from inconceivable.

The data released yesterday by the FDC - by FDIC, by the way, showed 117 banks and thrifts are now considered to be in trouble, and the FDIC warned that conditions will worsen, although it did say a majority of U.S. banks will be able to weather the storm. 98 percent still have an adequate stock pile of money by the regulator's standards.

BRAND: Well, let's talk more about the FDIC. It, obviously, is the insurer of banks of deposits up to 100,000 dollars, but with all these banks in trouble, is the FDIC in trouble?

MOON: Well, at this point, the FDIC hasn't had to borrow any money from the treasury, but its chairwoman says she won't rule out that possibility. It would be a temporary means of covering the cost of quickly reimbursing depositors and then would be paid right back to the treasury once the bank's assets would be liquidated.

BRAND: Thank you, Bob. That's Bob Moon of public radio's daily business show, Marketplace.

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Worsening Credit Markets Cause More Banks To Fail

Customers line up at an IndyMac branch in California. i 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

itoggle 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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