Capital Markets

FDIC: Expect More Bank Failures

Financial institutions' bleak Q3 financial results doesn't bode well for the agency's 2009 outlook.
Sarah JohnsonNovember 25, 2008

Third-quarter profits for banks and thrifts declined by 94 percent compared to last year, further calling into question the ability — and willingness — of financial institutions to lend.

The aggregate net income for the quarter ended Sept. 30, was $1.7 billion, compared to $28.7 billion earned during the same period in 2007, reports the Federal Deposit Insurance Corp. Almost one in every four institutions insured by the FDIC had a net loss for the third quarter, a period punctuated in its final weeks by the collapse of thrift Washington Mutual, and a liquidity crisis that continues to make corporate borrowing difficult and costly.

In announcing the somber — yet not surprising — financial results of the commercial banks and savings institutions they insure, FDIC officials predicted more stress on the banking system next year. “We expect more banks to fail,” said FDIC chairman Sheila Bair. The agency now characterizes 171 institutions, with combined asset values of $116 billion, as “problem” institutions. It’s the first time in 14 years that bank assets on the FDIC problem list have exceeded $100 billion.

So far this year, the FDIC has reported 22 bank failures. With $307 billion in assets, WaMu was the largest failure in the FDIC’s 75-year history. Still, Bair said, “most banks remain well-capitalized, profitable, and sound.”

Only so-called “healthy” banks are eligible to receive a slice of the $700 billion bailout pie under the Treasury Department’s Capital Purchase Program. The program allows Treasury to purchase the preferred stock of qualified financial institutions. The CPP, which initially made $125 billion available for stock purchases, is one of the government’s recent actions designed to infuse capital into the financial markets. Currently, 30 banks are participating in the program.

Bair asked for the public’s patience in giving the government’s Band-aids time to work. She encouraged community banks to apply for the Treasury’s program, and so far, more than 1,000 have applied. Moreover, the FDIC recently finalized a program that temporarily backstops senior unsecured debt issued by banks, thrifts, and holding companies. Goldman Sachs reportedly used the program to sell $5 billion in bonds this week.

Financial institutions have had to record losses on poor-performing loans for residential mortgages for some time, but are now seeing rising losses on commercial loans as well. “At this stage of the credit cycle, loan performance problems are spreading to a much wider range of lenders and categories of loans,” Bair said. “This trend is linked to a weaker economy and uncertainty in the financial markets.”