Spike in warnings for troubled banks may presage more failures

Regulators are telling more troubled financial institutions to clean up their acts, a sign that this year's surge in bank failures is likely far from over.

The number of banks warned to halt practices deemed "unsafe and unsound" by banking industry overseers surged by about a third in the second quarter to 86, according to data compiled by MortgageDaily.com.

Being on the receiving end of such an admonition is a bad sign because many such banks prove too damaged to turn themselves around. Two dozen lenders censured from April to June have already been seized by regulators.
The surge in these warnings -- called "cease-and-desist orders" in financial industry parlance -- comes as the tally of failed banks continues to rise. Eighty-nine banks have been closed so far this year, an average of about 11 per month, including some relatively big regional lenders like Texas-based Guaranty Bank and Alabama's Colonial Bank.

Even if the sharp jump in these orders is startling, it's easy to see how they foreshadow an uptick in bank failures. The same forces that push lenders to the edge -- rising loan defaults and late payments, mostly -- and earn them a warning from regulators can also force them over it.

All told, MortgageDaily.com's analysis shows, regulators issued 263 orders, including directives to raise capital or fines for imprudent behavior, in the second quarter, nearly 50 percent more than in the previous three months.

And yet the entire universe of banks on the brink is even larger. The Federal Deposit Insurance Corp. says there are 434 lenders on its official list of troubled banks. And a study by research firm SNL Financial and TheStreet.com found that 116 banks are "undercapitalized" and aren't maintaining a big enough buffer against future losses.

Not every bank on the receiving end of a regulator's warning is in imminent danger of failing. And, as far as people with savings and checking accounts at troubled banks are concerned, the risk is minimal in any case because the FDIC guarantees deposits up to $250,000. But data like this gives a clearer picture of just how distressed the banking industry is.
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