The number of troubled U.S. banks leaped to the highest level in about five years and bank profits plunged by 86 percent in the second quarter, as slumps in the housing and credit markets continued.
Federal Deposit Insurance Corp. data released Tuesday show 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.
The FDIC also said that federally insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the quarter.
“Quite frankly, the results were pretty dismal,” FDIC Chairman Sheila Bair said at a news conference, but they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets.
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The majority of U.S. banks “will be able to weather” the economic and housing storms, with 98 percent of them still holding adequate capital by the regulators' standards, Bair said.
Total assets of troubled banks jumped from $26 billion to $78 billion in the second quarter, the FDIC said, with $32 billion of the increase coming from IndyMac Bank, which failed in July – the biggest regulated thrift to fail in the U.S.
“More banks will come on the (troubled) list as credit problems worsen,” Bair said. “Assets of problem institutions also will continue to rise.”
Nine FDIC-insured banks have failed so far this year, compared with three in all of 2007. More banks are in danger of collapsing this year, Bair and other FDIC officials said, and they expect turbulence in the banking industry to continue well into next year.
IndyMac's failure and others in the quarter reduced the federal deposit insurance fund from $53 billion to $45 billion. Bair said the agency will raise insurance premiums paid by banks and thrifts to replenish its reserve fund and bolster depositors' confidence.
The $50.2 billion set aside to cover loan losses in the April-June period was four times the $11.4 billion the banking industry salted away a year earlier.
Except for the fourth quarter of 2007, the earnings reported Tuesday were the lowest for the banking industry since the end of 1991, the agency said.
Concern has been growing over the solvency of some banks amid the housing slump and the steep slide in the mortgage market. The pressures of tighter credit, tumbling home prices and rising foreclosures have been battering banks of all sizes nationwide.
The FDIC has kept an especially close eye on banks and thrifts with high levels of exposure to the riskiest borrowers and markets, agency officials say, including subprime mortgages and construction loans in overbuilt areas.
Another area of potential concern: banks' holdings of preferred stock of troubled mortgage giants Fannie Mae and Freddie Mac. A government rescue of the companies could be costly for scores of banks that hold billions in their preferred shares.
The FDIC doesn't disclose the names of institutions on its internal list of troubled banks.