FDIC Fund Slides into the Red as Banks Pull Back Lending
By: Carrie Bay
It’s official: the overwhelming number of bank failures since the onset of the nation’s financial crisis have pushed the FDIC’s insurance fund into negative territory. The agency said Tuesday that its reserve used to protect consumers’ deposits when a financial institution goes under is $8.2 billion in the hole.
This marks only the second time in history that the FDIC’s capital supply has fallen below zero. The first occurrence was in the third quarter of 1992, during the agency’s clean-up of the savings and loan crisis.
FDIC officials warned back in September that the government-run deposit insurance fund was heading for broke. Since that foreboding premonition, the agency has implemented a new payment structure requiring insured institutions to prepay three years worth of fees in order to replenish its purse. The FDIC expects to rake in over $45 billion from this unprecedented billing arrangement, but collection of this added capital doesn’t begin until December 30.
Technically, though, the FDIC says it has plenty of money to cover any near-term bank closures. Just as banks set aside capital to cover anticipated loan losses, the agency has stashed away an additional $38.9 billion to deal with what is expected to be another steady stream of institutional failures next year. With this contingent reserve, the FDIC’s finances actually show a positive balance of $30.7 billion.
FDIC Chairman Sheila Bair says she expects the cost of bank failures between 2009 and 2013 to reach about $100 billion. Bair said Tuesday that the agency’s watchlist of what it considers “problem” banks climbed to 552 at the end of the third quarter, up from the second quarter’s tally of 416. The new figure represents about 7 percent of all U.S. banks.
In the Tuesday release of the FDIC’s quarterly assessment of the nation’s banking landscape, the agency also reported that banks’ cut lending in Q3 by the largest amount since the government began tracking loan activity in 1984, with declines recorded in every loan category, from commercial and real estate mortgages to small business and corporate funding.
Total loan balances of FDIC-insured institutions fell by $210.4 billion, or 2.8 percent, compared to the second quarter of this year, indicating that banks are still reluctant to extend credit which analysts agree is an essential element of an economic recovery. According to the report, large banks were responsible for 75 percent of the decline. It’s these institutions that hold more than half of the industry’s assets and were the primary recipients of the government’s bailout program – funding intended to jumpstart lending.
“For now, the credit adversity we have been observing for some time remains with us, and we expect that it will be at least a couple of more quarters before we see a meaningful improvement in that trend,” Chairman Bair said.
Soured loans – particularly in real estate – are still a daunting obstacle for the financial industry’s revival. In the third quarter alone, banks charged off $50.8 billion in bad loans, or 2.71 percent of assets. That figure is up from $28.1 billion a year earlier.
Noncurrent loans and leases increased by $34.7 billion during the July to September time period. At the end of the third quarter, these noncurrent assets stood at $366.6 billion, or 4.94 percent of the industry’s total loans and leases.
Despite the pull-back in lending and more bad loans on the books, banks reported aggregate net income of $2.8 billion in the third quarter of 2009. The quarterly earnings were more than three times the $879 million the industry earned a year earlier and represented a significant improvement over the collective $4.3 billion net loss in the second quarter of 2009. Twenty-six percent of all insured institutions reported an individual net loss in the latest quarter.
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