FDIC doesn't see bank failures surging

The Federal Deposit Insurance Corp. is trying to rehire 25 former employees specializing in bank insolvency, but the agency that insures bank deposits said it does not expect a surge of failures in the industry.

Federal Reserve Chairman Ben Bernanke raised some eyebrows this week when he suggested during congressional testimony that the U.S. will likely see some banks fail in upcoming months due to the ongoing credit crunch and a weakening housing market.
"There will probably be some bank failures," Bernanke told Congress Thursday. "There are some small and in many cases de novo [new] banks that have heavily invested in real estate in locales where prices have fallen. Among the largest banks, the capital ratios remain good and I don't expect any serious problems among the larger banks."
"Our problem bank list has 76 institutions, low by historical standards," said Andrew Gray, a representative for the FDIC. "In 1990, there were close to 1,500 on the list. Typically, the number of failures for a given year does not approach the number of banks on the list."

In contrast, more than 800 banks failed between 1990 and 1992 after a severe recession brought on by the savings and loan crisis proved to be too much for many overleveraged smaller banks.

Analysts also cried foul on Bernanke's suggestion, with Punk Ziegel analyst Dick Bove pointing out Friday that even when three small banks failed during the fourth quarter of 2008, the market barely registered the change.

All three of those were regional banks: Douglass National Bank in Kansas City, Mo., Miami Valley Bank of Lakeview, Ohio, and NetBank in Alpharetta, Ga.

"Virtually no one was even aware that this happened because it was akin to the proverbial tree falling in the forest," Bove said Friday, adding he isn't worried about the 76 banks currently on the FDIC's radar.

"The average asset size of these troubled banks and thrifts is less than $300 million. All of them could fail and it would have no impact on the system," Bove said.
FDIC report shows issues, but agency says they aren't terminal.

Recent data from the FDIC support the idea that these days most U.S. banks are well positioned to ride out any approaching storm.

"The industry as a whole is coming off a golden period of record profits," FDIC Chairwoman Sheila C. Bair said in the agency's Quarterly Banking Profile, released earlier this week. "Because of this financial strength, the overwhelming majority of banks and thrifts remain well-capitalized and profitable."

The report showed that 99% of insured institutions were currently well-capitalized at the end of 2007 and close to 90% of those were also profitable, despite the fact that profits at the banks and thrifts fell to a 16-year low in the fourth quarter of 2007.

Indeed, American banks posted earnings above $100 billion for the sixth consecutive year. But the industry as a whole took a bath on overall loan losses last year, with loan loss provisions more than doubling in 2007 to $68.2 billion from $29.5 billion a year earlier. "The rising trend in noncurrent loans indicates that write-offs and loss provisions will likely remain high for the near future," Bair said.

So far, banks are girding for the tough times ahead by shoring up close to $30 billion in capital during the fourth quarter alone. And while losses at American banks grabbed headlines in 2007, much of that news is attributable to a few highly publicized missteps by the banking sector's larger player.

"The magnitude of the decline in industry earnings was attributable to a relatively small number of large institutions," Bair said, pointing out that the median return on assets only fell 14 basis points compared with the much higher drop of 102 basis points for some larger banks.

"Seven large institutions accounted for more than half of the total year-over-year increase in loss provisions," Bair said. "Ten large institutions accounted for the entire decline in trading results."