As Bank Failures Mount, Deposit Safety Net Shrinks

A new report on the state of the nation’s banking industry raises concerns over the stability of the financial sector and cast renewed doubt on the strength of pace of the broader recovery.

The Federal Deposit Insurance Corporation’s Quarterly Banking Profile report for the third quarter shows bad loans (charge-offs) continued to grow, lending remained down and deposits in bank accounts stayed flat. During the first nine months of the year, the number of failed institutions insured by the FDIC climbed to 95 – more than seven times that of the year-ago period. And several performance indicators – most notably charge-off rates and loan balances – have attained the dubious distinction of “worst on record.”

All this comes at a time when the FDIC’s Deposit Insurance Fund, which protects your deposits should your bank fail, has fallen in the red for the first time since 1990. It decreased by $18.6 billion during the third quarter, to a negative $8.2 billion.

Should you be worried about your cash? Not necessarily. Despite the increasing number of troubled banks, consumers’ FDIC-insured deposits are safe as long as they fall under the coverage threshold, which is $250,000 per individual account through the end of 2013. In fact, the main reason for the decline of the DIF is that the FDIC is setting aside additional funds ($21.7 billion) to cover future bank failures.

If you’re still worried about your bank’s health, you could easily do your own check-up by looking at some basic indicators that publicly-held banks disclose in their annual financial reports filed with the Securities and Exchange Commission. (Privately-held banks file “call reports” with the FDIC, which contain this information as well.) For the details, click here.

Below are the highlights of the FDIC’s latest Quarterly Banking Profile. For the full report, click here.

Problem institutions up threefold. The FDIC counted 552 problem institutions through the end of the third quarter this year, up from 171 for the same period in 2008.

Bank failures increase seven times. In the first three quarters of 2009, 95 banks failed, compared with 13 for the same period last year. Fifty institutions failed in the third quarter alone, the largest number since the second quarter of 1990, when 65 insured institutions failed.

Domestic deposits flat. Total deposits increased by $79.8 billion (0.9%) during the quarter, but that increase came largely from activity in foreign offices (up $81.9 billion, or 5.6%). Domestic deposits declined by $2 billion, or 0.03%.

Non-interest accounts down; interest-bearing deposits up. Domestic non-interest-bearing deposits decreased by $17.7 billion, or 1.2%, while saving deposits and interest-bearing checking accounts increased by $152.5 billion (4.4%).

Loan losses up 80%. For the 11th consecutive quarter, net charge-offs registered a year-over-year increase. Insured institutions charged off $50.8 billion in the quarter, an increase of $22.6 billion compared with the third quarter of 2008.

Highest charge-off rate on record. Annualized, the net charge-off rate rose to 2.71%, from 1.43% a year earlier: This is the highest net charge-off rate in any quarter since insured institutions began reporting quarterly income and expenses in 1984. This is also the third time in the past four quarters that the net charge-off rate has reached a new high.

Charge-off breakdown. Banks charged off $4.4 billion in credit-card loans, up 78.2%. Residential mortgage charge-offs were up by $3.7 billion, or 63.4%. Charge-offs on home equity lines of credit were $2.2 billion higher, up 78.4%.

Largest quarterly decline in loan balances on record. Total loan and lease balances declined by $210.4 billion, or 2.8%, during the quarter: the largest percentage decline in loan balances in any quarter since insured institutions began reporting quarterly results in 1984. Residential mortgage loan balances declined by $83.7 billion, or 4.2%.