By ERIC DASH
Published: February 23, 2010
The Federal Deposit Insurance Corporation is bracing for a new wave of bank failures that could cost the agency many billions of dollars and further strain its finances.
Skip to next paragraph With bank failures running at their highest level in nearly two decades, the F.D.I.C. is racing to keep up with rising losses to its insurance fund, which safeguards savers’ deposits. On Tuesday, the agency announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.
Not all of those banks are destined to founder, and F.D.I.C. officials said Tuesday that they expected failures to peak this year. But they also warned that the fund might have to cover $20 billion in additional losses by 2013 — a bill that could be even greater if the economy worsens.
F.D.I.C. officials say the fund has ample resources to cope with its projected losses.
“We think that we have the cash we need,” Sheila C. Bair, the F.D.I.C. chairwoman, said in an interview on Tuesday. She said it was unlikely the F.D.I.C. would need to tap its emergency credit line with the Treasury Department, although she did not rule out such an action.
Despite resurgent profits and pay at the giants of American finance, many of the nation’s 8,000 banks remain under stress, according to a quarterly report the F.D.I.C. released Tuesday.
About 140 banks failed in 2009, and Ms. Bair said she expected even more than that to go under this year. The F.D.I.C. does not disclose which banks it considers at risk.
Bad credit card, mortgage and corporate loans escalated in the final months of 2009 — the 12th consecutive quarterly increase — albeit at a slower pace. During the fourth quarter, the banking industry as a whole turned a mere $914 million profit. “We’ve gone from the eye of the hurricane to cleaning up after the hurricane,” said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York.
Still, with so many banks failing, the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.
The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.
After slipping into the red last fall, the F.D.I.C. moved swiftly to refill its coffers. The agency imposed a special assessment on banks that gave it an immediate $5.6 billion cash infusion. That assessment was in addition to the ordinary payments that banks make to the F.D.I.C. fund.
In September, the F.D.I.C. ordered banks to prepay quarterly assessments that would have otherwise been due through 2012. That provided an additional $46 billion to restore the fund to normal. For accounting purposes, the agency will add that money to the fund in small doses over the next 13 quarters, which explains the current negative balance.
Together, these moves buy time for the agency to determine its next steps in the event its losses worsen. In such a case, banks might be called on to chip in more money, either through new special assessments, prepaid fees or premium increases. F.D.I.C. officials said no such plans were in the works.
“The good news is that the industry will power through this,” said Bert Ely, a longtime banking industry consultant in Washington. The fund has “taken a lot of hits along the way, but I still don’t expect the taxpayer to ride to the rescue.”
To protect the fund, the F.D.I.C. also has found creative ways to bring in more money. On Tuesday, Ms. Bair said that the agency would soon issue bonds backed by the assets of failed banks and guaranteed by the government. The program aims to attract nontraditional buyers of bank assets, like insurance companies, pension funds and mutual funds.
“We would like to test the market to see if we can get better pricing,” Ms. Bair said. “We may or may not succeed, but we thought we should try it.”
The F.D.I.C. has also tried to entice private equity firms and other investment groups to bid for insolvent banks, with mixed success. The agency is betting that more potential buyers will ultimately result in higher prices.