Is Your Bank on the Problem Bank List?
The Federal Deposit Insurance Corporation, the federal agency in charge of safeguarding the nation’s bank deposits, maintains a Problem Bank List. This list contains the names of institutions that are likely to have weak capital positions that can lead to failure. The FDIC does not publicize the list for fear of causing a run on the bank, but you can view an unofficial list of Problem Banks at calculatedriskblog.com.
As of the latest report released by the FDIC there were 552 problem banks at September 30, 2009 up from 416 on June 30, 2009. Total assets held by the troubled institutions is $345.9 billion.
The historic low for the Problem Bank List was reached in the third quarter of 2006 with 47 banks. The FDIC’s Problem Bank List of 552 banks is the largest number since the fourth quarter of 1993 when there were 575 institutions on the list.
In general, banks included on the list have serious deficiencies with their finances, operations, or management that threaten their continued solvency. Once a bank is included on the list, they are subject to closer regulatory scrutiny. They can also expect to receive instructions from regulators about what steps must be taken to rebuild their financial strength.
After a holiday rest of three weeks since the last banking failures on December 18, 2009, regulators announced the first banking failure of 2010 on January 8, 2010. The honor of the first failed bank for 2010 belongs to Horizon Bank of Bellingham, WA. The Horizon Bank failure will cost the FDIC over half a billion dollars, which amounts to a stunning 41% of Horizon Bank’s assets at the time of closing. For the week ending February 5, 2010 there was 1 more banking failure, resulting in a total of 16 banking failures for 2010.
The total number of Failed Banks for 2009 was 140, the largest number since 1992 when 181 banks were closed by regulators. For all of 2008 there were 25 bank failures. In 2007 only 3 banks failed. For the five year period from 2002 to 2006, a total of 18 banks failed.
Why Are Problem Banks Allowed To Stay Open?
The reason regulators do not close more insolvent banks may be due to the fact that the FDIC Deposit Insurance Fund (DIF) fell below zero as of September 30, 2009 for the first time since 1992. A number of large banking failure could deplete the entire insurance fund and cause panic among bank depositors. The DIF reserve ratio at September 30, 2009 was -.16 percent (negative $8.2 billion), the lowest ratio since March 31, 1993. The FDIC DIF contingent loss reserve of $38.9 billion are reserves already set aside to cover estimated losses for the next year. The combined contingent loss reserve and the DIF fund balance combined result in a total DIF reserve of $30.7 billion at September 30, 2009.
The FDIC has already publicly acknowledged that the DIF must not be allowed to fall to dangerously low levels when it approved a measure on November 12th to require insured institutions to prepay 3 years of FDIC insurance premiums of about $45 billion at the end of 2009.
The FDIC believes that it is important that the fund not decline to a level that could undermine public confidence in federal deposit insurance. A fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.
Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors. The FDIC views the Treasury line of credit as available to cover unforeseen losses, not as a source of financing projected losses. The FDIC projects that the reserve ratio will fall to close to zero or become negative in 2009 unless the FDIC receives more revenue than regular quarterly assessments will produce, given the rates adopted in the final rule on assessments.
FDIC Requests Massive Line Of Credit From The Treasury
The FDIC previously projected a substantially higher bank failure rate over the next couple of years and admitted that the DIF could be completed wiped out this year which is exactly what has happened. The FDIC DIF fund of only $30.7 billion provides deposit insurance protection on over $5 trillion of insured deposits - see DIF Fund Running on Empty.
The FDIC views the line of credit at the Treasury as being available to cover “unforeseen losses”. If that is the case, then the FDIC must have seen the potential for massive “unforeseen losses” since it requested and was approved for an increase in the line of credit from the Treasury to $500 billion from the current $30 billion. This increased line of credit would be available to address “systemic risks” and potentially allow the FDIC to inject funds into banks that otherwise would face closure. The FDIC has admitted that it cannot presently resolve more failed banks without depleting its insurance fund and potentially panicking the public.
On May 20, 2009 the President signed into law a bill authorizing increased FDIC insurance coverage on deposits as well as an increase of the FDIC’s line of credit with the Treasury.
The new law increases the FDIC’s line of credit at the Treasury to $100 billion from $30 billion. The FDIC’s viewpoint on the line of credit with the Treasury was recently spelled out by the FDIC as follows:
Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors. The FDIC views the Treasury line of credit as available to cover unforeseen losses, not as a source of financing projected losses.
Should extraordinary circumstances arise, the FDIC also has the authority to borrow up to $500 billion from the Treasury with the consent of both the Federal Reserve and the Treasury Department.
One “Special Assessment” Was Not Enough
The FDIC imposed a special assessment in the amount of 5 basis points on each FDIC depository institution’s assets as of June 30, 2009. This special mid year assessment proved inadequate due to numerous banking failures and in late September 2009, the Deposit Insurance Fund (DIF) was depleted by the increasing number of banking failures. The FDIC took additional steps to increase the DIF by requiring FDIC insured financial institutions to prepay three years of deposit assessments. This measure is expected to add $45 billion to the DIF. The FDIC took this action in recognition of the reality that hundreds of additional banks will fail (see FDIC To Bolster DIF With Prepaid Assessments).
