Corporate Governance

An Uneasy Trend: FDIC reports increase in the number of banks on its ?problem? list

By Carol Straw

As of March 2008, the FDIC reported that 90 banks surfaced on its ?problem? list radar, up from 76 for the last quarter of 2007. This number comprised $26.3 billion in assets, or about 0.2 percent of total assets in FDIC insured banks. According to James Chessen, chief economist at the American Bankers Association, a Washington-based industry group, ?it?s still very small historically and unlikely to cause significant problems to the FDIC-insured fund. However, Gerald Cassidy, an analyst at RBC markets in Portland, Maine, expects 300 U. S. banks to fail in the next few years, mainly because of mounting losses from real estate-related loans.

Last month, the closing of IndyMac, the third-biggest U. S. bank failure, may cost the fund $4 to $8 billion. By August, the closures of seven other banks are expected to follow IndyMac?s fate at an estimated cost of $1.16 billion. Altogether, these closures may erase as much as 17 percent of the government insured fund. FDIC Chairman, Sheila Bair, has said that premiums for deposit insurance will likely rise.

Bair also added that the FDIC has options if failures escalate and further drain the fund. The agency can tap a $30 billion line of credit at the Treasury Department and borrow up to 40 billion from the Federal Financing Bank to cover assets at failed banks. If that fails to stop the continual bleeding of financially strapped banks, the U. S. congress can step in to protect depositors with legislation and appropriations as it did during the savings and loans crisis by creating the Resolution Trust Corp. in 1989 to manage the closings of 747 failed thrifts.

The development suggests that the banking industry will continue to experience ongoing reverberations from the subprime mortgage crisis which has yet to be fully played out.

Full post as published by PomTalk on August 12, 2008 (boomark / email).