List of 'problem banks' grows to 117

The credit crisis took a heavier toll on banks in the second quarter of the year: The number of troubled banks rose 30%, to 117, the highest in five years, from 90 in the first quarter, the Federal Deposit Insurance Corp. said.

The surge in the FDIC's "problem banks" comes as the industry grapples with ballooning bad consumer loans and shrinking profits. Historically, about one in eight banks on the problem list have eventually failed.

The FDIC also said that in the latest quarter, banks' profits plunged 87%, to $5 billion, compared with the same quarter a year ago.

"By any yardstick, it was another rough quarter for bank earnings," Sheila Bair, chairman of the FDIC, said Tuesday. Still, she added, most banks remain "fundamentally sound."

Assets of troubled banks soared to $78 billion in the second quarter, from $26 billion in the first quarter. The second-quarter figure includes $32 billion in assets from IndyMac Bank of Pasadena, Calif. In July, IndyMac became the fourth-largest bank ever to fail, after adjusting for inflation.

Overall, troubled banks represent only about 1.4% of 8,451 insured institutions. But the rise in troubled banks is worrisome because additional failures could worsen the economic downturn, analysts say. Nine banks have failed so far in 2008, compared with three in 2007.

"There is an underlying crisis here," says Michael Williams, director of research at Gradient Analytics. "The mortgage market has melted down, which has an underlying impact on the banks, especially those that have high subprime exposure."

Research firms keep their own list of banks they think are at risk of failing. Based on such a list, Institutional Risk Analytics estimates that 110 banks, with a combined $850 billion in assets — about 6% of the industry's assets — will fail by July 2009.

Most troubled banks will recover, the FDIC says. They'll shore up their finances by boosting their capital, their earnings or the quality of their loans.

Still, rising bank failures are eating into the FDIC's Deposit Insurance Fund, which reimburses depositors. In the second quarter, its balance fell to $45.2 billion, down 14% from the first quarter. To boost fund assets, the FDIC said it's considering raising banks' premiums for deposit insurance, with troubled banks paying more because of their higher risk of failure.

Michael Heller, president of Veribanc, a bank rating and research firm, says higher premiums are "appropriate." Still, he says, "this is the worst time to do it," because it could exacerbate banks' financial woes.