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Problem banks expand 30%

Tuesday, August 26, 2008, 12:12 PM

U.S. Says Banks on 'Problem List' Rose 30% in Quarter

Aug. 26 (Bloomberg) -- The U.S. Federal Deposit
Insurance Corp. said its `"problem list'' of banks increased 30 percent
in the second quarter to the highest total in five years as more
commercial real-estate loans were overdue.

"Quite frankly, the
results were pretty dismal, and we don't see a return to the high
earnings levels of previous years any time soon,'' FDIC Chairman Sheila
Bair said at a news conference in Washington.

The deposit
insurance fund fell 14 percent to $45.2 billion and the reserve ratio,
or balance divided by insured deposits, was 1.01 percent. The FDIC is
required to shore up the fund when the ratio falls below 1.15 percent.

It’s worth
noting that not every bank on the problem list will fail, and not every
failure will be on the list. To my knowledge, IndyMac was not on the
list prior to failing. But the trend here tells us something
meaningful; a 30% increase in problem banks in one quarter says we’re
still in the early stages of this credit crisis.

Also, I have
always thought that the 1.15% “coverage ratio” was better suited to
trouble-free times than to any period of instability. It simply will
not take much in the way of bank troubles to wipe out that FDIC fund.
What will be interesting will be to see the approach the FDIC takes to
securing more funds. Will they hit up all banks equally, nail the bad
banks a bit more, or tap the taxpayer? Each of these routes has very
different pros and cons.

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