Bank insurance fund down 20 percent in 2Q

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With bank failures rising, the government’s deposit insurance fund fell 20 percent to $10.4 billion in the second quarter as U.S. banks lost $3.7 billion.

The Federal Deposit Insurance Corp. said Thursday that surging levels of soured loans at banks dragged down profits in the April-June period. The $3.7 billion loss compared with profits of $7.6 billion in the first quarter, and $4.7 billion a year ago.

The FDIC also said the number of banks deemed to be in trouble jumped to 416 from 305 at the end of the first quarter. That’s the highest number since June 1994 during the savings and loan crisis. Total assets of troubled institutions surged to $299.8 billion from $220 billion in the first quarter.

Eighty-one banks have failed so far this year, and hundreds more are expected to fall in coming years because of souring loans for commercial real estate. That threatens to deplete the FDIC’s fund, which guarantees deposits of up to $250,000 per account. The new level of the insurance fund puts the ratio at 0.22 percent, compared with the congressionally mandated minimum of 1.15 percent.

The FDIC said nearly 66 percent of banks and savings and loans reported earnings below those in the second quarter of 2008, and more than a quarter posted a net loss.

“While challenges remain, evidence is building that the U.S. economy is starting to grow again,” FDIC Chairman Sheila Bair said in a statement. “The banking industry, too, can look forward to better times ahead. But for now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line.”

The 8,195 federally insured banks and thrifts set aside $66.9 billion in the second quarter to cover potential loan losses, up from $60.9 billion a year earlier.

The FDIC’s insurance fund has been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.

That has happened only once before ? during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest.

Small and midsize banks nationwide have been hurt by rising loan defaults in the recession. When they fail, the FDIC is responsible for making sure depositors don’t lose a cent.

It has two options to replenish its insurance fund in the short run: It can charge banks higher fees or it can take the more radical step of borrowing from the U.S. Treasury.

None of this means bank customers have anything to worry about. The FDIC is fully backed by the government, which means depositors’ accounts are guaranteed up to $250,000 per account. And it still has billions in loss reserves apart from the insurance fund.

Because of the surging bank failures, the FDIC’s board voted Wednesday to make it easier for private investors to buy failed financial institutions.

Private equity funds have been criticized for taking too many risks and paying managers too much. But these days fewer healthy banks are willing to buy ailing banks, and the depth of the banking crisis appears to have softened the FDIC’s resistance to private buyers.

Copyright 2009 The Associated Press.