Although recent housing and economic data have signaled that—perhaps—the nastiest recession since the Second World War is planning its retreat, news from the nation's already-beleaguered banking sector continues to worsen. On Thursday, the Federal Deposit Insurance Corp., which guarantees deposits at the nation's nearly 8,200 banks, announced that the sector's deteriorating health has forced it to add more than 100 new institutions to its list of so-called problem banks. When the second quarter closed, the FDIC had 416 banks on the list, up sharply from just 117 a year earlier and its highest level in 15 years. At the same time, the agency's fund used to reimburse the depositors at failed banks has declined about 20 percent, to $10.4 billion. In light of these developments, it's natural for consumers to wonder about the safety of their bank deposits. For anyone with such concerns, here are five things you should know:
1. Economic impact: As the nearly two-year-long recession has driven the unemployment rate to more than 9 percent, it has created serious problems for banks. When more borrowers lose their jobs, they become less able to repay their loans, leaving banks on the hook for additional losses. At the same time, the historic housing crash has gutted the values of homes from coast to coast. This has made some borrowers more willing to simply walk away from their homes altogether rather than continue to make payments on a devaluing investment. Furthermore, problems in the commercial real estate sector are hitting bank balance sheets as well, as businesses go bankrupt in growing numbers. "Falling collateral values increase the likelihood of distressed residential and commercial developers just walking away," says Mike Larson of Weiss Research. The impact of the still-rickety economy was clearly visible in the FDIC's most recent figures—released Thursday—which showed that 4.35 percent of all bank loans and leases were noncurrent. That's the highest level in more than a quarter century.
2. Earnings drag: Banks, of course, need to set aside cash to cover these bad loans. And that's just what they did last quarter, earmarking nearly $67 billion—or 33 percent more than a year earlier—for loan losses. This large provision hammered the industry's bottom line, creating a net loss of $3.7 billion for the period, compared with a $4.8 billion profit a year earlier. "Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," FDIC Chairman Sheila Bair said in a statement. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago."
3. Bank failures: A growing number of banks have already gone belly up in the recession. All told, 81 banks have failed this year, including large institutions like Colonial BancGroup in Alabama and Guaranty Financial in Texas. By way of comparison, 25 banks failed in 2008, and just three went under in 2007. Analyst Richard Bove of Rochdale Securities said recently that the financial crisis may take out as many as 200 banks. But after the release of Thursday's figures, he now expects even more banks to fail. "I think that that estimate is probably too low at this point because you have 416 banks on the troubled bank list, and that list is not finished climbing," he says.
4. Insurance fund: So what does a bank failure mean for you? Well, if you have money at any of the nearly 8,200 federally insured banks, your cash is protected even if your bank goes under. The FDIC guarantees up to $250,000 per depositor per bank. "The FDIC was created specifically for times such as these," Bair said. "No matter how challenging the environment, the FDIC has ample resources to continue protecting depositors as we have for the last 75 years." Still, the rising failed-bank tally has taken a toll on the fund the FDIC uses to reimburse depositors. The fund stood at around $10.4 billion at the end of the second quarter, down sharply from more than $50 billion in June of last year, according to Bove.
5. Is your money safe? The fund's depletion, however, is a concern for the banks, not their depositors. "Don't worry," says longtime banking industry consultant Bert Ely. "The FDIC has no problem protecting the insurance fund." After all, deposit insurance is absolutely vital to the American banking system, and the federal government will do whatever it takes to ensure it has enough cash to reimburse depositors of failed institutions. Regulators have already taken steps to do this, charging banks roughly $5 billion in fees so far this year to bolster the fund. Bove argues that additional bank assessments will be needed to ensure the fund has enough cash. "In my view, there will be an assessment every two quarters right through 2011," he says. "Those assessments will be in the $4 [billion] to $5 billion range in each six-month period." While these potential assessments will certainly be a drag on bank earnings, they help ensure that depositors will remain protected. In addition, the agency has a line of credit with the Treasury Department it could tap if need be. "No insured depositor has ever lost a penny of insured deposits . . . and no one ever will," Bair said.