FDIC's Problem Bank List Increases - Analyst Blog

The number of banks on the Federal Deposit Insurance Corporation's (FDIC) list of problem institutions in the third quarter grew to 860 from 829 in the previous quarter and 552 in the year-ago quarter, the organization said on Tuesday. This is the highest since the savings and loan crisis in the early 1990s.

Banks that feature on the problem list are most likely to fail, 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 gradually, bank failures are snowballing.

How Big Are the Problem Banks?

Most of the problem banks are small institutions; the total assets of the problem banks fell to $379 billion in the third quarter of 2010 from $403 billion in the prior quarter. Although about 11% of FDIC insured institutions are on the problem list, total assets of problem banks represent only 7% of total FDIC insured deposits.

The Fail Trail So Far

There have been 149 bank failures so far this year, compared to 140 in 2009, 25 in 2008 and just 3 in 2007. Increasing loan losses on commercial real estate are expected to cause hundreds more banks to fail in the next few years.

While the bigger banks have benefited greatly from the various programs launched by the government, many smaller banks are still struggling. Tumbling home prices, soaring loan defaults and a high unemployment rate continue to cast their shadow on such institutions. Failure of both residential and commercial real estate loans as a result of the credit crisis has primarily hurt banks.

With the industry absorbing bad loans offered during the credit explosion, the banking system has been exposed to greater problems, aggravating the possibility of bank failures.

The Health of the FDIC

The FDIC insures deposits in 7,830 banks and savings associations in the country, promoting the safety and soundness of these institutions. When a bank fails, the organization 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 couple of quarters, the outbreak of bank failures has tested its limits. As of September 30, 2010, the fund remained in the red with a deficit of $8 billion despite adding $7.2 billion during the quarter.

Further straining the dwindling FDIC reserves, the amount of assets from the failed banks is expected to be lower as banks have been cleaning up their balance sheets.

On the positive side, the consolidated earnings of the FDIC-insured banks came in at approximately $14.5 billion during the third quarter, significantly up from $2.8 billion in theyear-ago quarter.

Increasing loan losses on commercial real estate are expected to lead to hundreds more bank failures in the next few years. The FDIC expects bank failures to cost about $52 billion over the next four years.

En Route to an Oligopolistic Market?

The bank failures have resulted in a wave of consolidation in the industry. When Washington Mutual was in the red in 2008 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.

 
BB&T CORP (BBT): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
US BANCORP (USB): Free Stock Analysis Report
 
Zacks Investment Research