The number of banks on the Federal Deposit Insurance Corporation’s (FDIC) list of problem institutions saw a marginal increase to 888 in the first quarter from 884 in the previous, the agency said on Tuesday. This is the highest number since March 31, 1993, when there were 928 problem institutions due tothe savings and loan crisis.
Things looked a little brighter once again in the first quarter, with the pace of increase in the problem list moderating substantially and the FDIC insured banks witnessing strong overall profit.
The problem list includes banks that face imminent failure due to low capital support, though some may survive and pull out of the crisis. As of now, only less than a quarter of the banks on FDIC's problem list have actually failed. This ratio, however, may change with the mismatch of the pace of increasing bank failures and problem institutions.
How Big Are the Problem Banks?
Most of the problem banks are small institutions. Total assets of these banks increased to $397 billion at the end of first quarter from $390 billion at the end of 2010. This represents a phenomenal 66 fold jump approximately, from $6 billion in assets of 50 problem institutions in 2006.
Bank Failures So Far
There have been 43 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 could trigger hundreds of bank failures in the coming years. However, considering the fail trail so far this year, the FDIC does not expect the number of bank failures in 2011 to surpass the 2010 tally.
While the financials of bigger banks have been stabilizing on the back of an economic recovery, many smaller banks are still struggling to survive. Nagging issues like rock-bottom home prices along with still-high loan defaults and unemployment levels continue to trouble such institutions.
Lingering effects of the financial crisis continue to weigh on many banks. It becomes a prerequisite for such banks to absorb bad loans offered during the credit explosion, making them susceptible to some severe problems. This vicious layout is aggravating the risk of bank failures even further.
What’s the FDIC’s Role?
The FDIC insures deposits in 7,575 banks and savings associations in the country as well as promotes the safety and soundness of these institutions. The number is, however, down from 7,657 in the prior quarter.Now, the problem banks represent about 11.7% 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.
Financial Health of FDIC
Though the FDIC has managed to shore up its deposit insurance fund during the last few quarters, the ongoing bank failures has kept it under pressure. As of March 31, 2011, the fund remained in the red with a deficit of $1.0 billion, substantially better than a deficit of $7.4 billion in the prior quarter. As the deficit significantly narrowed during the quarter and the fund is almost close to break-even, the agency expects it to be in the black in the next quarter itself.
Strong Profit: A Confidence Booster
While the lists of problem and failed banks are stretching, first quarter consolidated profit from the FDIC-insured banks reached the highest level since mid 2007. The consolidated profit of the FDIC-insured banks came in at $29.0 billion during the quarter, up 66.7% from $17.4 billiona year ago.
However, only 1.4% of the total FDIC insured banks earned about $24.4 billion of the consolidated profit. These are primarily the large banks, including JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Bank of America Corp. (BAC) and Citigroup Inc. (C),which were supported by government bailout money and low borrowing rates.On the other hand, smaller banks that are still tottering were not able contribute much.
Is Consolidation the Conclusion?
With so many bank failures, consolidation has become the industry fashion. For almost all of the failed banks, the FDIC enters into purchase agreement with healthy institutions. When Washington Mutual collapsed in 2008 (branded as the largest bank failure in the U.S. history), it was acquired by JPMorgan Chase & Co. 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 economy will not be able to experience wealth and welfare optimization.
BANK OF AMER CP (BAC): Free Stock Analysis Report
BB&T CORP (BBT): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
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