FDIC Bank Insurance Fund Plunges Into Red

Though the banking industry saw profits of $2.8 billion last quarter, the spate of bank failures this year has plunged the FDICs insurance fund into the red by $8.2 billion.

The government agency that backs bank deposits announced today that the recent flood of bank failures plunged the insurance fund into the red in late September and more banks are now on the brink of collapse than at any point in the last 16 years.

The Federal Deposit Insurance Corporation said 552 insured institutions are on its "Problem List" as of the end of the third quarter of this year, up from 416 at the end of the second quarter. The 552 institutions have a combined $345 billion in assets. Both the number of banks on the list and their combined assets are now at the highest levels since the end of 1993.

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During the third quarter, 50 banks collapsed, the highest number of failures since the fourth quarter of 1992. In all, 124 banks have failed thus far this year.

The rising tide of bank failures has taken a severe toll on the FDIC's basic insurance fund for deposits. Over the quarter the fund dropped by $18.6 billion to negative $8.2 billion in late September – the first time the fund has gone into the red since 1992. But since the agency has set aside $38.9 billion in contingent loss reserves to cover estimated losses over the coming year, the fund now has a positive balance of $30.7 billion. In another move to bolster the fund, the FDIC earlier this month decided to make banks prepay three years worth of fees in advance, a move that they say will boost the fund by $45 billion.

Despite the continued struggles of the financial sector, there were some positive signs in the FDIC's third quarter update. Insured institutions returned to profitability, earning $2.8 billion in net income during the third quarter, an improvement over the $4.3 billion net loss they racked up in the second quarter. Also, 43 percent of institutions reported higher quarterly earnings compared with a year ago. However, total loan balances held by the FDIC's 8,100 institutions fell by $210.4 billion, a 2.8 percent drop that is the largest percentage decline on record since reporting started in 1984

"Today's report shows that, while bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance," FDIC Chairman Sheila Bair said in a statement.

"For now, the credit adversity we have been discussing for some time remains with us, and we expect that it will be at least a couple of more quarters before we see a meaningful improvement in that trend," Bair said. "Despite the challenges, I am optimistic that if we address these problems head-on, we will see clear signs of improvement in bank earnings and lending in 2010."

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