More Banks Are At Risk of Failing, Yet the Worst May Be Over

The struggling banking industry showed some signs of life in the beginning of this year, logging the highest first-quarter profit since 2008, according to a report by the Federal Deposit Insurance Corp.

But the FDIC report released Thursday didn't paint an overly rosy picture of the industry. It said that 775 banks are on its list of "problem" institutions, defined as banks that may be in jeopardy of failing. The number of problem banks represents about 10% of all U.S. banks and is up from 702 at the end of 2009.

For some context, the number of problem banks was 48 in 2006. The FDIC notes that most problem banks don't end up shutting down. The list is kept confidential by the agency.

Nothing Quite Like 1993

To get numbers these high, return to 1993 when there were 793 problem banks. Adding to the banking industry woes is the fact that the number of shuttered banks this year has already reached 72, and the annual total is expected to surpass last year's 142 failed institutions.

"There will be more failures, to be sure. The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility," said FDIC Chairman Sheila C. Bair during her presentation of the report. She added that given the quarterly profit shows "trends continue to move in the right direction."

The quarterly FDIC report is considered a lagging indicator, meaning that while the economy has gained strength in some areas, banks are still catching up. Some banks are indeed returning to profit, as evidenced by the $18 billion profit for U.S. banks in the first quarter, a $12 billion improvement from the same period last year.

The FDIC attributed the profit to banks not putting as much money aside to cover bad loans. And more banks were indeed showing positive balance sheets in the first quarter: About 19% were in the red during the period, down from 33% in the fourth quarter.

Some Signs of Life

"I don't want to overstate it -- and this was certainly not a healthy quarter -- but it is more encouraging," says Robert Strand, senior economist for the American Banking Association. "The last few years have been tough, and we're on a more positive track."

Strand says that banks had traditionally shown steady growth over the past several decades, and these last few years have been tough on the industry. He wouldn't say, however, that times are nearly as bad as the banking crisis in the 1980s and 1990s.

The FDIC report noted that its Deposit Insurance Fund balance sat at negative $20.7 billion at the end of the first quarter, a bit better than the last quarter of 2009.

"Demands on cash will increase this year as failure activity peaks," Bair said. "But our projections indicate that we have the necessary industry-funded resources to complete the cleanup."

She also noted that already this quarter, the FDIC has tracked more banks raising money to strengthen their balance sheets or to buy other banks.