U.S. Fund for Bank Deposit Insurance Falls Into the Red

U.S. Fund for Bank Deposit Insurance Falls Into the Red
By ERIC DASH
Copyright by The New York Times
Published: November 24, 2009
http://www.nytimes.com/2009/11/25/business/economy/25fdic.html?hpw


The government-administered insurance fund that protects depositors fell $8.2 billion into the red for the first time since the fallout from the savings-and-loan crisis of the early 1990s as the pace of bank failures accelerated in the third quarter.

Bank customers, however, should remain confident that their deposits would be protected since the bulk of that negative balance reflects money the agency has set aside to cover future bank failures.

Federal Insurance Deposit Corporation officials warned in October that the deposit insurance fund had been depleted, but Tuesday’s third-quarter report card on the banking industry marked the first time that hard numbers had been released. Even amid early signs that the economy is recovering, the report suggested that the country’s 8,100 lenders remain in fragile condition.

In its state of the industry report, the F.D.I.C. reported that banks posted a $2.8 billion gain in the third quarter, after a $3.7 billion loss in the previous period. Meanwhile, the number of “problem banks” that run the biggest risk of collapse increased to 552, from 416 in the second quarter. Bad loans of virtually every stripe — credit cards, mortgages, small business and commercial real estate — continue to grow, albeit at a slower pace.

“The credit adversity we have been discussing for some time remains with us, and we expect it will be a couple of more quarters before we see a meaningful improvement in that trend,” Sheila C. Bair, the F.D.I.C. chairman, said. “I am optimistic that if we address these problems head on, we will see clear signs of improvement in bank earnings and lending in 2010.

Even so, the number of bank failures will likely keep climbing. So far, the F.D.I.C. has seized and sold 124 banks in 2009, and analysts expect hundreds more to collapse in the months ahead. That has put significant pressure on the F.D.I.C. fund, which posted a negative balance for the first time since 1992 when regulators cleaned up the carnage from hundreds of failed thrifts and other commercial lenders.

Federal officials have also taken action to replenish the fund. The agency recently approved plans calling for industry to lend money to the insurance fund by ordering banks to prepay annual assessments that would otherwise have been due through 2012.

That move is expected to add about $45 billion to the fund, which stood at $34.6 billion a year ago, but should avoid straining bank earnings thanks to favorable accounting treatment. It also averts the political risk of tapping an emergency credit line from the Treasury Department, though some banking experts believe such action may still be necessary. The industry report card also showed how the banks troubles have spread. Two years ago, the problems seemed to be contained to a handful of big banks, which took large markdowns on the value of complex mortgage assets and other securities.

But as the big banks have regained their swagger from big trading profits over the last three quarters, the problems afflicting the bulk of the industry’s lenders — soured loans made to consumers and property developers — have grown considerably worse. Over all, banks charged off $50.8 billion in the third quarter, or 2.71 percent of assets. That is the highest charge-off rate in any quarter since the government began collecting data in 1984.

More banks have also collapsed because of the bad debts. Federal regulators seized 50 banks in the third quarter, including regional players like Colonial Bank of Alabama, Guaranty Financial of Texas, and Corus Bancshares of Chicago. That was roughly the twice the total number of banks that failed in 2008.

The high cost of the failures has strained the deposit insurance fund, which thousand of banks support by paying quarterly premiums. As of the end of the third quarter, its balance stood at negative $8.2 billion. The bulk of the fund’s losses stem from money that regulators set aside to cover future failures, allowing it to operate in the red.

F.D.I.C. officials expect that bank failures will cost the insurance fund $100 billion over the next five years. More than half of that cost has already been accounted for, while the new prepayment plan is expected to cover the rest. If losses grew considerably worse, officials might have to impose additional special assessments on banks or draw on the Treasury’s backup credit lines.

In September, Ms. Bair said she did not anticipate having to immediately tap that line of credit, although she did not rule it out. “I never say never,” Ms. Bair said at the time.