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."
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.
Taxpayers to the Rescue
Normally, when a bank fails there is adequate money to pay back depositors. But since the start of the year, nine banks have been closed by the government, the largest being IndyMac on July 11. These banks had a combined $25 billion in assets, although the federal government is not on the hook for all of that money.
For instance, of IndyMac's $19 billion in assets, about $1 billion in deposits were not insured, and the bank had enough other assets to pay back an additional $9.1 billion. The FDIC estimated today that it would have to pay out $8.9 billion in insurance, up from previous estimates of $4 billion to $8 billion.
The FDIC, created in 1933 during the Great Depression to help restore the public's confidence in the nation's banking system, receives no federal tax dollars and is funded through the institutions that it insures. Currently it has $50.2 billion set aside to cover bank failures, nearly 20 percent of which is likely to be depleted in the IndyMac insurance payback alone.
If a few more large banks -- or a lot of small banks -- fail, that fund could quickly become depleted.
Sean Egan, who heads the ratings desk of Egan Jones, sees more bank failures on the horizon but took a bit more conservative approach than Ryan.
"We wouldn't be surprised by another 15 banks," failing before the end of the year, Egan said. "But keep in mind, that many of them are smaller institutions."
He said another half dozen or so could also fail next year. Despite the lower estimate, Egan said that "absolutely" there is a chance that the FDIC could deplete its reserve fund.
"It would put a lot of pressure on the FDIC if another major bank were to fail," he said.
Most Public Money Safe
When a bank fails, the FDIC has to pay money out to depositors immediately while it takes time to sell off the bank's remaining assets to replenish those funds. In that circumstance, Egan said, the Treasury might be forced to loan the FDIC money.
Ultimately though, Ryan said depositors with less than $100,000 in the bank have nothing to worry about.
"The reality is anybody who is within that threshold shouldn't lose any sleep at night," he said. "For all the kind of unjustifiable bailouts being done on Wall Street there's no chance that the government is going to let John Q. Public's money disappear."
Keep Your Money Safe
The FDIC protects deposit accounts including checking and savings accounts, money market deposit accounts and certificates of deposit up to the federal limit. The insurance does not cover products such as stocks, bonds or mutual funds, even if they are sold by your bank.
The basic insurance protects up to $100,000 in deposits at each institution for each type of ownership category. That means one individual could be insured for up to $100,000 for a single account and another $100,000 in a joint account with a spouse or somebody else.
There is also a separate $250,000 insurance limit for various types of retirement accounts, including IRAs, Section 457 plans and Keogh plans.
The type of account or bank branch makes no difference when calculating your insurance limit. You do not double your insured amount by opening both a checking and savings account at a single bank or opening accounts at separate branches of the same bank.