FDIC Warns of More Bank Troubles

Aug. 26, 2008— -- The health of U.S. banks is quickly deteriorating, and the government fund set up to protect depositors might not have enough money to insure everybody, analysts told ABCNews.com.

The Federal Deposit Insurance Corporation, or FDIC, insures bank deposits of up to $100,000 at nearly 8,500 of the nation's banks and also keeps a watch list of banks that it considers in trouble.

Thanks to a collapsing housing market and a weak economy, a growing number of banks are struggling to stay afloat, with not enough cash on hand to cover losses from bad loans.

At the beginning of the year, 90 banks were on the FDIC watch list. There are now 117, FDIC chairwoman Sheila C. Bair announced at a news conference this afternoon. That is the highest number in five years, but some analysts expect the list to grow even more in coming months.

"I think there's going to be a steady drip, drip, drip of bad news," said Sean Ryan, a banking analyst with Sterne Agee. "We've only seen the very tip of the iceberg in terms of bank failures."

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Even though only nine banks have failed so far this year, Ryan expects that to quickly climb with more than 100 failures before the end of 2009.

"I would be quite surprised if we didn't reach triple digits," he said. "Most of them are going to be relatively small institutions, but they will add up."

"I fully expect the FDIC insurance fund to be depleted," Ryan added. "The FDIC is going to be one of what is going to be an increasing string of government bailouts."

If that happens, ultimately taxpayers will be on the hook. The FDIC borrows money with a line of credit from the U.S. Treasury, which essentially is taxpayer money.

Robert Reich, former secretary of labor under President Clinton, told ABC News that "it's obvious to anyone who is following these numbers that our banking system is very weak right now."

Reich, now a public policy professor at the University of California at Berkeley, said that while the situation is not a crisis, "it's very serious."

"How long will it be before this clears up? It could be another year at least," Reich said. "I don't think we will see a huge number of bank failures, but undoubtedly as government oversight intensifies and capital requirements have to be met, some banks will be in trouble."

"Probably between 10 and 25 small, mostly regional banks are treading water right now," Reich added. Some of those might cease operations, he said, "but depositors should have no problem at all" because of the FDIC insurance.

Reich said the chances of the FDIC completely depleting its reserve fund is "unlikely but certainly not impossible."

Banks in Trouble

Profits at the 8,500 FDIC-insured banks fell by 86 percent in the second quarter of this year, the second lowest quarterly total since 1991.

Many banks also lost money.

Almost 18 percent of all banks covered by the FDIC were unprofitable in the second quarter, up from 9.8 percent in the second quarter of 2007.

"By any yardstick, it was another rough quarter for bank earnings," said the FDIC's Bair.

The FDIC doesn't publicize the names of the banks on its watch list. The theory is: If the list were disclosed, customers would pull their money out of the troubled banks, causing them to fail.