The FDIC Problem Bank List ... Is There a Problem?
by Gene Kirsch | August 29, 2011
Yes, it’s true the FDIC keeps a list of problem banks.
They tell us there are 888 institutions on the list, but they don’t tell us which ones. Doesn’t make sense? Sure it does when you consider the FDIC’s mission is to promote public confidence and stability in the banking system.
Because the FDIC does not release specific information or name individual banks on the Problem List, it’s hard to tell what the real level of concern should be when it comes to the nation’s banks. However, all you have to do is look at the numbers to see there is considerable backlog of problem banks with exposed assets. And then you have to wonder if there will be an avalanche of failures in the second half of 2011 and 2012.
Take a look at what’s been happening ...
The number of banking institutions has been shrinking over the last 20 years to approximately 7,574. That’s 50% less than there were in 1990. While at the same time, the FDIC list of problem banks has been growing. In fact, those 888 institutions on the FDIC’s Problem Institution List as of March 31, 2011, represent 11.72% of the nation’s banks. That’s the highest percentage since these statistics have been tracked.
And problem assets have also ballooned to $397 billion — levels not seen since the savings and loan crisis of 1990-91. Yet after peaking in 2010, failed banks have declined both in number and percentage over the past year.
In this case, fewer failures may be reason for concern ...
Looking at the Weiss Ratings list of weak or problematic institutions, there are 2,553 banks rated weak (with a D+ or lower rating on a scale of A to E). That’s three times the FDIC level. And even if you look at the shorter Weiss list of 1,156 institutions with a rating of D- or lower, that’s still 30% higher than the number of problem banks recognized by the FDIC.
Given the Fed’s lack of foresight in identifying the calamity of the past crises, you have to wonder: Are they identifying all the troublesome banks and taking corrective action to prevent future failures? Or are they trying to keep us confident that the sky won’t fall?
Without specifics from the FDIC list, it’s hard to tell. But we can look at a few of the important numbers from the most recent Quarterly Bank Profile and apply some reasoning.
For instance, the FDIC reported the industry’s seventh consecutive quarterly rise in profits to $29 billion for Q1, 2011. Sounds impressive, but is it?
Not really. The FIDC’s opening remarks largely contribute the rise in profits to a decrease in loan loss provisions on the banks’ books! In other words, banks are setting aside less money to cover future loan losses. But, setting aside fewer reserves is not real growth.
Furthermore, by reducing reserves for loan losses, banks are making the assumption that the economy is improving and there will be fewer loan defaults in the future. Yet high rates of unemployment, slow economic recovery, and rising consumer prices don’t support that. Still, banks have dropped their loan loss provisions to half the level they were a year ago from $51.6 billion in 2010 to $20.7 billion in 2011. This aggressive reduction in reserves seems questionable when there is real potential for continued loan losses.
And although 56.2% of the banks reported improved earnings, the industry’s net operating revenues (net interest income plus noninterest income) were actually lower than at year ago at $5.5 billion (or 3.2%). The FDIC noted that this is only the second time in 27 years that the industry has reported a year-over-year decline in revenues. Undoubtedly, not a good sign.
Then there’s lending activity, the main driver of bank revenues, which were also reported lower in the most recent quarterly data, falling by $126.6 billion. With little sign of improvement in the housing market, it’s not likely this will turn around in the near future either.
So while there are fewer unprofitable institutions with 1,163 (15.3%) as of Q1 2011 compared to the crisis high of 2,811 (53%), there are still double the 7.5% we saw before the crisis years 2000-2007.
Now, you have to ask yourself: Do the regulators have it right this time, or are these signs that larger problems loom beneath the surface?
While only time will tell, we know there are considerably more banks with problems than the FDIC has listed. And we don’t see the stars aligning to fix these problems any time soon. Best advice: Be watchful, check Weiss Ratings each quarter for rating changes and stay tuned as we keep you informed.
Gene Kirsch, senior financial analyst at Weiss Ratings, has more than 20 years of financial industry experience in credit-risk management, commercial lending and loan review analysis within various sized credit unions, finance companies and banks at both the retail and commercial level. He leads the firm's bank and thrift ratings division and developed the methodology for Weiss' credit union ratings.