Debts & Loans

The list of “problem” banks grew by almost 50 per cent in the third quarter, the Federal Deposit Insurance Corporation reported on Tuesday, stoking fears that further bank failures could put the agency’s insurance fund under severe pressure.

Sheila Bair, FDIC chairman, suggested more failures were likely in spite of government support for the banking industry. While the US Treasury’s capital purchase programme would bolster bank capital levels and revive lending, she said the scheme was not intended to help banks that were not “viable”, such as those on the problem list.

The number of problem banks, those deemed at risk of failure, grew from 117 to 171 in the third quarter, the largest number since the end of 1995, according to the FDIC’s quarterly report. Total assets of problem institutions increased to $115.6bn from $78.3bn.

The FDIC is working on plans to raise additional capital to shore up reserves that have been depleted by 22 bank failures so far this year, including Washington Mutual, the biggest bank to go under in US history.

Provisions for current and future failures have reduced the FDIC’s deposit insurance fund to $34.6bn, down from $45.2bn at the end of June.

The FDIC insures up to $250,000 per depositor in each bank, a temporary increase on the previous level of $100,000 that will expire at the end of 2009.

The agency is required by law to make sure its insurance fund has at least $1.15 for every $100 of insured deposits, a calculation that does not currently include the additional temporarily insured deposits.

The fund slumped to 76 cents for every $100 of insured deposits in the third quarter, a ratio that would be much lower if the temporary $250,000 insurance level were made permanent.

The FDIC said commercial banks and savings institutions reported new income of $1.7bn in the third quarter, a 94 per cent decline from the $28.7bn the industry reported a year earlier, as banks put aside more money for bad loans and sold securities and other assets at a loss. Almost one in four banks reported a net loss in the quarter.

“We’ve had profound problems in our financial markets that are taking a rising toll on the real economy,” said Ms Bair.

She urged community banks – those with assets of less than $1bn – to tap the FDIC’s debt guarantee programme and to apply for the US Treasury’s capital purchase scheme to help maintain lending levels in their communities.