U.S. Banking System Remains Anemic Amid Signs of Economic Growth

FDIC report finds more banks on problem list; Bair says sector remains a "lagging indicator"

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There have been a number of heartening signs lately that the recession is not only slowing but may even, technically, be over. This week alone confirmed the advance estimate from the Bureau of Economic Analysts that GDP in the second quarter fell by only 1%, from the Census Bureau that orders for big-ticket items increased 4.9% in July, from Standard & Poor's that the Case-Shiller Home Price Index showed price rises in 18 of 20 cities that the index tracks, and from the Conference Board that even consumer confidence has rebounded after several months of decline.

However, there is one area of the economy that remains significantly weak: the banking sector. On August 27, FDIC Chairman Sheila Bair released the agency's Quarterly Banking Profile, which revealed a mixed picture of the industry but certainly indicated that it remains troubled. For instance, Bair said that FDIC-insured commercial banks and savings institutions lost an aggregate of $3.7 billion in the second quarter, compared to the $4.8 billion in profits reported by those institutions in the second quarter of 2008. Indicators of asset quality continued to worsen during the second quarter, the FDIC said, though net interest margins improved.

However, the number of institutions sitting on the FDIC's "Problem List" rose to 416 with total assets of $299.8 billion as of the end of June, compared to 305 on March 31, bringing the number of banks on the list--which suggests that a bank is at a high risk of insolvency--to its highest level since June 30, 1994.

Already this year, 81 FDIC-insured banks have failed, compared to 25 in all of 2008.

Also, as of the end of the second quarter, total reserves of the FDIC's Deposit Insurance Fund (DIF) fell to $42.4 billion, its lowest level since 1993. Bair distinguished the DIF's reserves from the FDIC's cash holdings, however, which included $22 billion of cash and U.S. Treasury securities held as of June 30, as well as it ability to borrow up to $500 billion from the Treasury. "A decline in the fund balance does not diminish our ability to protect insured depositors," she argued in a prepared statement.

Commenting on the overall report, Bair said that "Banking industry performance is--as always-- a lagging indicator." While she said that the industry can, like the overall economy, "look forward to better times ahead," for the moment, "the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line."

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