The number of banks on the Federal Deposit Insurance Corporation’s (FDIC) list of problem institutions grew to 884 in the fourth quarter from 860 in the previous quarter, the agency said on Wednesday. This is the highest number since the savings and loan crisis in the early 1990s. However, the quarter witnessed strong overall profits by the FDIC insured banks.
Banks that feature on the problem list face imminent failure, though some may survive and pull out of the crisis. As of now, only less than a quarter of banks on FDIC’s problem list have actually failed. This ratio, however, is likely to change. While the list is increasing at a slower pace, bank failures are accelerating.
Size of Problem Banks
Most of the problem banks are small institutions. Total assets of these banks increased to $390 billion in the fourth quarter from $379 billion in the prior quarter, but plummeted from $403 billion reported at the end of 2009.
Bank Failures: Cause and Consequence
There have been 22 bank failures so far this year, preceded by 157 in 2010, 140 in 2009 and 25 in 2008. Increasing loan losses on commercial real estate are expected to result in hundreds of bank failures in the forthcoming years. However, the FDIC does not expect the number of bank failures in 2011 to surpass the 2010 tally.
While the various programs launched by the government worked in favor of the bigger banks, many smaller banks are still struggling to survive. Plunging home prices, lofty loan defaults and a high unemployment rate continue to cloud such institutions.
With the industry absorbing bad loans offered during the credit explosion, the banking system is vulnerable to some severe problems. This is aggravating the risk of bank failures even further.
The Role and Health of FDIC
The FDIC insures deposits in 7,657 banks and savings associations in the country, promoting the safety and soundness of these institutions. Now, the problem banks represent about 11.5% of the total number of institutions covered by the FDIC. When a bank fails, the agency reimburses customers for deposits of up to $250,000 per account.
Though the FDIC has managed to shore up its deposit insurance fund during the last few quarters, the outbreak of bank failures has tested its limits. As of December 31, 2010, the fund remained in the red with a deficit of $7.4 billion, slightly better than a deficit of $8.0 billion in the prior quarter. The agency expects the fund to be in the black later this year.
The FDIC expects bank failures to cost the deposit insurance fund about $100 billion by 2013. So, the agency will have to arrange the amount by that time to avoid a deficit.
Rising Profitability: A Relief
While the lists of problem and failed banks are stretching, fourth quarter consolidated profit from the FDIC-insured banks reached the second highest level since mid 2007. The consolidated profit of the FDIC-insured banks came in at $21.7 billion during the quarter, significantly better than the loss of $1.8 billion incurred a year earlier.
For full year 2010, banks reported a profit of $87.5 billion compared with a loss of $10.6 billion in 2009 as 67.5% of the FDIC-insured banks reported higher profit. The number of unprofitable institutions decreased to 21.0% from 31.0% in 2009.
The Price of Consolidation
Government efforts have clearly failed to rein in the unemployment problem, with banks still grappling with weak financials.
With so many bank failures, consolidation has become the industry fashion. When Washington Mutual was in the red in 2008 and was branded as the largest bank failure in the U.S. history, it was acquired by JPMorgan Chase & Co. (JPM). The other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB) and BB&T Corporation (BBT).
If the current pace of consolidation continues, we will see the emergence of a handful of large banks, exposing the industry to an oligopolistic market. As a result, the overall economy will not remain unscathed.
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