The mortgage mess that has upended millions of homeowners’ finances is now taking a bigger bite out of the nation’s banking system.
And while depositors with insured accounts face little risk of losing their money, the insurance fund’s top regulator said it may have to borrow money from the Treasury to make good on that promise to consumers.
In separate reports, regulators that oversee the nation's banks and thrifts reported that profits are falling and the number of bad loans on the books is rising.
On Wednesday, the Office of Thrift Supervision said the nation’s roughly 830 thrifts lost $5.4 billion in the second quarter and set aside a record amount of money to cover losses from bad mortgages and other loans. That was the thrift industry’s second-largest quarterly loss ever, after a $8.8 billion loss in the fourth quarter of last year.
The news followed Tuesday’s report from the Federal Deposit Insurance Corp. that the number of troubled banks jumped in the second quarter to the highest level in about five years. Bank profits plunged by 86 percent, as slumps in the housing and credit markets continued.
The FDIC said 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003. (The agency doesn't disclose the names of institutions on its internal list of troubled banks; doing so would likely spark a run on deposits. On average, 13 percent of banks that make the list fail.)
While the vast majority of banks are in good shape to weather the ongoing housing downturn and credit crunch, the problems faced by the banking industry will likely get worse before they get better, according to FDIC Chairwoman Sheila Bair.
“We don't think this credit cycle's bottomed out yet,” she told reporters at a press conference releasing the latest data. “I don't like to make predictions, but I think it's going to continue to be very challenging. And I think the number of banks and assets on the troubled bank list will continue to go up."
The main problem faced by banks and regulators is that no one knows just how many more loans will go bad. And the answer to that question won’t be known until house prices stop falling. Until they do, the mortgages on those houses — and the bonds created by Wall Street that are backed by those mortgages — will continue to lose value.
Banks also hold billions of dollars worth of stock in troubled mortgage giants Fannie Mae and Freddie Mac, whose share prices have plummeted as the mortgage mess has swamped the government sponsored enterprises with huge losses. A government bailout of the companies could do further damage to those stock holdings. Bair said the FDIC is "closely monitoring that situation."
While the risk of bank failures has increased, depositors who stick to FDIC-insured banks — and keep their deposits under the limits covered by the fund — have little to worry about. For most accounts, that means keeping the balance under the $100,000 maximum on deposit insurance. (Individual Retirement Accounts are covered up to $250,000.)
The limits apply to each account, so depositors with higher balances who divide their savings among accounts in separate banks are also covered. (Multiple accounts in the same bank may also be covered if they’re divided among separate “ownership categories" — which include single accounts, retirement accounts, joint accounts or revocable trusts.)
So far, only nine lenders have failed this year, the largest of which was Pasadena, Calif.-based IndyMac, which was taken over by the FDIC in July with about $32 billion in assets and $19 billion in deposits. It was the second-largest financial institution to close in U.S. history, after Continental Illinois National Bank in 1984.
Those failures have depleted the insurance fund, which now stands at $45 billion — less than the FDIC is supposed to have on hand, according to Daniel Alpert, an investment banker at Westwood Capital.
“You’re talking about roughly $45 billion of reserves insuring $4.5 trillion of deposits,” he said. “And you’re in an environment right now where non-current loans, delinquent loans are increasing at a faster pace than banks putting aside reserves. That's not a good thing.”
To replenish the insurance fund, the FDIC said it plans to raise the premiums it charges banks — and may charge the highest premiums to the banks with the riskiest deposits. While that will put the fund on a sounder footing, it could make life more difficult for bankers trying to shore up their own assets, according to Peter Sorrentino, a portfolio manager at Huntington Asset Advisors.
“You've got a risk of siphoning off capital when it's needed,” he said.
Bair also told the Wall Street Journal the FDIC couldn’t rule out the possibility that it may have ask the Treasury for capital to tide it over through the coming round of bank failures. The money would be used to pay depositors insurance claims, and then paid back after the assets of the failed bank are sold.