Federal Deposit Insurance Corp. Chairman Sheila BairHaraz N. Ghanbari
The U.S. recession might be over, but the country and its bloodied banking sector are struggling to cope with overstretched families and billions in soured loans.
The country's deposit insurance agency says troubled loans are now at their highest in 26 years and that credit is shrinking as unemployment and home foreclosures mount.
It all points to a troubled recovery for the world's biggest economy, where the crisis began and flashed around the globe.
"There is no question that credit availability is an important issue for the economic recovery," Federal Deposit Insurance Corp. chairwoman Sheila Bair said. "We need to see banks making more loans to their business customers."
Separately, the Federal Reserve said the recovery "would be rather slow, relative to historical experience," noting that high unemployment would weigh on consumer spending. The Fed also repeated its pledge to keep interest rates at ultralow levels for an extended period to assist the economy in its rebound.
The number of "problem" banks reached 552 at the end of September - the highest level in 16 years - up from 416 in June, the FDIC reported Tuesday. There was also a sharp drop in the value of loans on banks' books as institutions wrote off another $50.8-billion (U.S.) worth of bad loans - a 26-year high. More than a quarter of all U.S. banks are now losing money.
"Credit adversity … remains with us," Ms. Bair acknowledged to reporters. "We expect that it will be at least a couple of more quarters before we see a meaningful improvement in the trend."
U.S. banks got into trouble lending too much to consumers during the boom years earlier this decade. Consumers used credit to finance a buying binge - for homes, cars and the like - and then banks watched helplessly as homes and other asset prices collapsed, starting in 2007.
FDIC officials said the bigger problem now for troubled banks is commercial real estate, where just a handful of loan defaults can destabilize smaller institutions.
The FDIC estimates that the current wave of failure will cost it $100-billion (U.S.) through 2013, or more than it would normally collect in premiums from banks. So it recently moved to make banks prepay their premiums due over the next three years, raising an extra $45-billion.
Since June, 50 of the roughly 8,200 banks in the United States have failed, bringing to 95 the number of banks to succumb in the first nine months of the year. Since the report was compiled, another 28 banks have failed, for a total of 123.
The deluge of failures pushed the FDIC fund that insures bank deposits $8.2-billion into the red - only the second time in its history that it's had a deficit. The last time was in 1991.
The FDIC set aside $21.7-billion in provisions for additional bank failures in the quarter.
The FDIC guarantees deposits of up to $250,000. It monitors six measures of bank health, including profits, liquidity and capital. Roughly 13 per cent of the banks on the agency's watch list will fail.
The FDIC fund typically tries to find buyers for the failed banks. The agency then uses the proceeds to pay off whatever debts the bank has.
Any money owing to depositors is paid out of the fund.
In one of the few bright spots in the FDIC report, the banking industry returned to profitability in the quarter, posting aggregate net income of $2.8-billion, largely on the strength of higher net interest margins.
The industry lost $4.3-billion in the second quarter.
Analysts warned not to read too much into the better earnings.
"A few very large banks are making a pile of money, and the rest of the industry is hurting," said Daniel Alpert, managing director of the New York investment bank Westwood Capital LLC.
The largest Wall Street banks are benefiting from a host of government subsidies - such as capital injections, asset guarantees, low-cost borrowing - that cost taxpayers without improving the economy, Mr. Alpert said.
"We're creating riskless profits for the big banks," he said.
Among the report's most sobering finding is that credit is still shrinking, despite historically low interest rates and a host of government programs aimed at spurring lending.
The number of loans outstanding fell $210.4-billion, or 2.8 per cent.
That was largest quarterly decline since the FDIC began tracking loans in 1984.
Banks have tightened up their lending standards and no longer offer the kinds of no-strings-attached mortgages and other loans that were common during the real estate boom.
But there's also less demand for loans from consumers and businesses.
With files from Associated Press