Aug. 27 (Bloomberg) -- The U.S. added 111 lenders to its list of “problem banks,” a jump that suggests rising bank failures may force the Federal Deposit Insurance Corp. to deplete a reserve fund that shrank 40 percent this year.
A total of 416 banks with combined assets of $299.8 billion failed the FDIC’s grading system for asset quality, liquidity and earnings in the second quarter, the most since June 1994, the Washington-based FDIC said in a report today. Regulators didn’t identify companies deemed “problem” banks.
The U.S. has taken over 81 banks this year, including Guaranty Financial Group Inc. in Texas and Colonial BancGroup Inc. in Alabama, amid the worst financial crisis since the Great Depression. The surge forced regulators to charge banks an emergency fee to raise $5.6 billion for its insurance fund, which fell to $10.4 billion as of June 30 from $13 billion in the previous quarter, the agency said. The total was the lowest since the savings-and-loan crisis in 1993.
“We’re right in the middle of the cycle and it’s a very tough place to be,” said James Chessen, chief economist at the American Bankers Association, a Washington-based industry group. “We’ll have another couple of more quarters where banks will be working through these loan-loss problems.”
An $11.6 billion increase in loss provisions for bank failures caused the decline in the reserve fund, the FDIC said. If the fund is drained, the FDIC has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.
Line of Credit
The agency doesn’t expect to use the Treasury line of credit, FDIC Chairman Sheila Bair said in a news conference releasing the data. Bair said the number of problem banks and failures will remain elevated as banks and thrifts continue to clean up their balance sheets.
“For now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line,” she said.
FDIC-insured banks reported a net loss of $3.7 billion in the second quarter, compared with a $5.5 billion gain in the first quarter. The quarterly loss, the second the industry has reported in 18 years, was driven by increased expenses for bad loans, the FDIC said.
Funds set aside by banks to cover loan losses rose to $66.9 billion in the second quarter from $60.9 billion in the first quarter.
Nonperforming Loans
More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival, according to data compiled by Bloomberg.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
The FDIC insures deposits at 8,195 institutions with $13.3 trillion in assets. The agency is a state-bank regulator that insures bank customer deposits, helps find buyers for failing banks and liquidates lenders that have collapsed.
The agency this week approved new guidelines for private- equity firms that invest in failed banks to increase the pool of buyers beyond traditional lenders and reduce costs to the banking industry and taxpayers.
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