U.S. banks lost $26.2 billion in 4th quarter of 2008

WASHINGTON -- U.S. banks reported a net loss of $26.2 billion in the final quarter of 2008 — the worst performance since 1990 — as the number of troubled institutions climbed.

Fully 252 commercial banks and savings institutions, with total assets of $159 billion, were termed problem banks at the end of last year, "overwhelmed" by staggering real estate losses and the faltering economy, the Federal Deposit Insurance Corp. said Thursday.

By comparison, there were 171 problem lenders with $116 billion in assets in the third quarter of 2008, and 76 troubled banks with $22 billion in assets, at the end of 2007. The FDIC closed 25 banks during 2008 and has shut 14 this year. Problem banks, which the FDIC does not identify, have financial or other weaknesses that threaten their viability.

For all of 2008, the banking industry earned $16.1 billion, a nearly 84% drop from 2007 and the weakest showing since 1990. About 25% of institutions were unprofitable.

Banks charged off about $38 billion in troubled loans in the fourth quarter, more than double the amount in the 2007 period. They also more than doubled, to about $70 billion, the money set aside to cover potential losses.

FDIC Chairwoman Sheila Bair, pointing to one of the few pieces of good news, noted that bank deposits rose 3.5% at the end of 2008. "Clearly, people see an FDIC-insured account as a safe haven for their money in difficult times," Bair said.

The FDIC insures checking, savings and money market deposit accounts up to $250,000.

Analysts said banks will need a far bigger capital cushion, given how fast conditions are deteriorating. Moody's Economy.com said weakness in the banking industry extends from residential and commercial real estate loans to consumer and commercial loans.

The FDIC report comes as the Treasury Department begins to "stress test" the 19 biggest U.S. lenders to make sure they can weather a severe downturn. The White House Thursday unveiled a 2010 budget, including a $250 billion "reserve fund," that could support as much as $750 billion in government activity to shore up the financial system.