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 banks involved. An unofficial Problem Bank List is published by calculatedriskblog.com and contains the names of institutions that have been issued enforcement actions by banking regulators. The unofficial Problem Bank List currently totals 928 institutions compared to a total of 813 on the FDIC confidential list of problem banks.
The number of banks on the FDIC Problem Bank List totaled 813 problem banks at December 31, 2011, down slightly from 844 at September 30, 2011. The number of Problem Banks has declined for three quarters in a row from 888 at March 31, 2011. Total assets held by the troubled institutions is $319 billion, a decrease from $339 billion in the previous quarter.
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 813 banks is the largest number since September 30, 1992 when there were 1,066. Problem Banks now account for 11.0% of all banking institutions. As of December 31, 2011 there were 7,359 FDIC insured banking institutions with FDIC insured deposits of $6.98 trillion. The FDIC Deposit Insurance Fund, which protects insured depositors from loss when a bank fails, had a balance of only $9.2 billion at December 31, 2011 for a reserve ratio of 0.13%.
In general, banks included on the Problem Bank 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.
The pace of bank failures has been increasing dramatically over the past three years. A total of 92 banks failed during 2011, resulting in losses to the FDIC Deposit Insurance Fund of $7.22 billion. During 2010, a total of 157 banks failed, the most since 1992 when 181 were closed. Banking failures during 2010 cost the FDIC Deposit Insurance Fund $26 billion, bringing the fund balance to below zero. A total of 140 institutions failed during 2009 compared to only 25 during 2008. There were only 3 bank failures during all of 2007. No banks failed during 2005 and 2006.
For the week ending May 18, 2012, there was one banking failure, resulting in a total of 24 bank failures for 2012. The cost to the FDIC Deposit Insurance Fund for the 2012 banking failures currently totals $1.53 billion. The 24 failed banks had total assets of $6.55 billion.
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) had a balance of only $9.2 billion at December 31, 2011. A number of large banking failure could deplete the entire insurance fund and cause panic among bank depositors. The DIF reserve ratio at December 31, 2011 was 0.13% percent, far below historical ratios. The FDIC is currently backing every $1 million dollar of deposits with only $1,300 of reserves. The FDIC currently provides deposit insurance on $6.98 trillion.
Total deposits insured by the FDIC Deposit Insurance Fund have increased dramatically from $3.62 trillion in 2004 to $6.98 trillion at December 2011. Total assets of all FDIC insured institutions totals $13.8 trillion.
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 $46 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 $9.2 billion at December 31, 2011 provides deposit insurance protection on $6.98 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 $46 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).