By Damian Paletta and Michael R. Crittenden
WASHINGTON – The government insurance fund that protects more than $4.5 trillion in U.S. bank deposits fell to just $10.4 billion at the end of June, as the banking industry continues to struggle with souring loans.
The Federal Deposit Insurance Corp. fund is at its lowest level since mid-1993, during the savings-and-loan crisis. That makes it likely that the government will have to charge banks another special fee to recapitalize its reserves. Officials could also consider borrowing up to $100 billion from the Treasury Department, but they have avoided this option so far.
FDIC Chairman Sheila Bair briefs the media on the bank-and-thrift industry earnings for the second quarter of 2009 on Aug. 27.
FDIC Chairman Sheila Bair said Thursday that the agency had "ample" resources to protect depositors and had no immediate plans to raise or borrow funds. She said the FDIC expects the number of banks failing or at risk of failing to remain "elevated," even after the broader economy turns around. "Cleaning up balance sheets is a painful process that takes time," Ms. Bair said.
The agency said it had 416 banks on its "problem" list at the end of June, up from 305 at the end of March. Banks on the problem list are considered at higher risk of failure and face tougher regulatory scrutiny. The FDIC said assets of banks on the problem list totaled $299.8 billion—a figure that suggests that Citigroup Inc. and some of the country's other largest banks aren't on the list.
The FDIC, in a quarterly report, said the industry posted an aggregate net loss of $3.7 billion in the second quarter, mostly because banks increased expenses for bad loans. This is a reversal from the first quarter, when the banking industry turned a slight profit, and shows banks still have a long way to go to work through their problems.
The FDIC also said borrowers are falling behind on loans at record levels and across most major loan categories. The number of loans at least 90 days past due climbed for a 13th consecutive quarter, while the percentage of loans at least three months overdue hit 4.35%, the highest level recorded since the FDIC began collecting this data 26 years ago.
"Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," Ms. Bair said.
The biggest problem areas continued to be property-related loans, suggesting the housing market is still under stress despite some recent good news. The FDIC said residential mortgage loans at least 90 days past due climbed 12.7% in the quarter. The number of construction and development loans at least three months behind increased 16.6%.
Banks responded to the credit problems by writing off assets at a record pace and continuing to add to their reserves. Banks added $16.8 billion to their loan-loss reserves during the second quarter, while writing off $48.9 billion.
Even so, loans are souring faster than banks can sock away funds to cover potential losses. The FDIC said U.S. banks had only 63.5 cents in reserve for every dollar of loans at least 90 days past due at the end of the second quarter, the lowest level since the third quarter of 1991.
The $10.4 billion in the deposit-insurance fund was down from an already-low $13.3 billion at the end of March. The deposit-insurance fund topped $45.2 billion a year ago. The fund fell to 0.22% of insured deposits on June 30, the lowest level since March 31, 1993.
The FDIC said it added $10.2 billion to the fund in the second quarter through assessments, including a $5.6 billion special fee that banks were charged at the end of June, and other interest and fees. At the same time, it transferred $11.6 billion from the fund to a separate loss-reserve fund, bringing that fund up to $32 billion and giving the agency $42 billion in reserves to cover insured deposits.
Eighty-one banks have already failed so far this year, up from 25 in 2008. Bank failures this year have already cost the FDIC roughly $19 billion. The FDIC said the U.S. had 8,195 banks at the end of June.
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