Boom2Bust.com

Tough Times For U.S. Banks And Thrifts

Earlier today, data compiled by the Federal Deposit Insurance Corporation showed profits at federally-insured banks and thrifts plunged to a 16-year low in the fourth quarter as these institutions set aside a record-high amount to cover losses from bad mortgages. According to Associated Press business writer Alan Zibel, profits declined as major Wall Street banks wrote down asset values on mortgage-related investments. Zibel wrote:

Profits at the 8,544 FDIC-insured institutions between October and December dropped by 83.5 percent to $5.8 billion, hampered by soaring loan defaults and provisions for loan losses, the FDIC said. A year ago, these banks recorded $29.4 billion in profits.

It was the worst bank and thrift performance since the fourth quarter of 1991. Money set aside to cover loan losses totaled a record of $31.3 billion, up from $9.9 billion in the same quarter a year ago and $16.7 billion in the third quarter.

While losses accounting for more than half of the total decline in profits were concentrated in six large institutions, Zibel added:

However, FDIC officials said problems were also seen in community banks, with more than half of all banks insured by the FDIC reporting lower fourth-quarter earnings and half reporting growth in troubled loans.

According to a post today by Damian Paletta in the Wall Street Journal’s Economics Blog, the FDIC classified 76 banks as “problem” institutions for the fourth quarter of 2007 (up from 65 a quarter earlier), showing that a growing number of financial institutions are under strain. Paletta defined problem institutions as “those under closer regulatory scrutiny, as the banks are more likely to have weak capital cushions to prevent against failure.” He added that the FDIC never identifies which institutions are on the list, “as it could lead customers to rapidly withdraw funds from the bank.”

Paletta also wrote an article in the Journal today in which he said the Federal Deposit Insurance Corporation “is taking steps to brace for an increase in failed financial institutions as the nation’s housing and credit markets continue to worsen.” In “FDIC to Add Staff as Bank Failures Loom,” Paletta wrote:

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up “for preparedness purposes.”

While there have only been four bank failures in the past 12 months, FDIC Chairman Sheila Bair, Comptroller of the Currency John Dugan, and Office of Thrift Supervision Director John Reich have all warned of a pickup in bank failures, according to the Wall Street Journal. Jaret Seiberg, Washington policy analyst for Houston-based financial services firm Stanford Group, told the publication that:

Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia.

An independent agency of the federal government, the Federal Deposit Insurance Corporation was created by Congress in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. At the end of 2007, it had $52.4 billion in its fund that backstops the nation’s insured deposits, according to the Journal.