FDIC: More Than 300 Banks on 'Watch List'

May 27, 2009— -- The number of problem banks on the FDIC's "watch list" surged 21 percent to 305 at the end of the first quarter, the agency reported Wednesday.

These troubled institutions, according to the Federal Deposit Insurance Corp., have total assets of $220 billion. That compared with 252 banks on the list with $159 billion in assets at the end of 2008. On average, about 13 percent of banks on this list eventually fail.

"The banking industry still faces tremendous challenges," FDIC Chairman Sheila Bair said at a news conference Wednesday morning.

Already this year, 36 banks have failed, compared with 25 last year and only three the year before. The most costly failure occured just last week, when Florida's BankUnited collapsed, a move expected to cost the agency's fund nearly $5 billion.

During the first quarter of this year, 21 FDIC-insured institutions failed, the most in a quarter since 1992.

During the same quarter total industry assets declined by $302 billion, a drop of 2.2 percent, mainly due to downsizing at a number of large banks, according to the FDIC. This is the largest percentage drop in industry assets in a single quarter for which data is available and was due entirely to declines at eight banks.

At the press conference, Bair briefed reporters on her analysis of today's quarterly report.

One positive sign, she said, was that the industry did post a profit of $7.6 billion in the first quarter after losing a record $36.9 billion in the final quarter of last year.

"Industry earnings returned to the plus column in the first quarter, following a very large loss in the fourth quarter of 2008," Bair said. "However… first quarter net income was less than half of what the industry earned in the first quarter of 2008. Troubled loans continue to accumulate and the costs associated with impaired assets are weighing heavily on the industry's performance."

According to today's report, FDIC-insured banks put $61 billion aside during the first quarter to cover possible future loan losses. Meanwhile, the FDIC's insurance fund dropped to $13 billion as of the end of the quarter, down from $17 billion at the end of 2008. In addition to the $13 billion, the FDIC has set aside $28 billion in reserve to cover bank failures over the next 12 months.

Bair Says Fund Will Stay in Positive Territory

"I believe it will continue to decline this year," Bair said of the fund, although she added that it will "stay in positive territory."

The agency recently received a boost to its credit line at the Treasury Department, which would be tapped, if necessary, to cover insured deposits. The line of credit was increased from $30 billion to $100 billion, with the option to go as high as $500 billion.

"We really don't want to go to that step," Bair said of borrowing from Treasury. "We continue to rely on our industry-funded reserves."

Bair stated that the government's Public Private Investment Program to get bad assets off of banks' balance sheets will not allow banks to bid on their own assets.

"There will be no structure that will allow banks to bid on their own assets," she said.

But she noted that already "banks have been able to raise a lot of new capital", helping their delicate situation even in advance of the program's launch. At present, there are some concerns within the industry, Bair said, that may delay the start of the program.

"There continues to be discomfort about Congress' view of this program, whether the rules could potentially change," she said.

ABC News' Charlie Herman contributed to this report.