Problem bank list hits 775

chart_problem_banks2.top.gif By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- The government's list of troubled banks climbed to its highest level since 1992 in the first quarter, although the pace of growth moderated, according to a government report published Thursday.

The numbers, published as part of a broader survey on the nation's banking system by the Federal Deposit Insurance Corporation, revealed that the number of banks at risk of failing climbed to 775 during the first quarter.

That figure stood at 702 in the fourth quarter of 2009. A year ago, the number of banks on the FDIC's watch list was 305. Loan losses, particularly in areas like commercial real estate, have hit many lenders hard.

Still, the fact that the number of problem banks rose by just 10% from the end of the year may suggesting that some of the festering troubles in the industry are starting to subside.

"You can clearly see the rise in problem institutions moderated in the first quarter," said FDIC Chairman Sheila Bair.

Banks that end up on the problem list are considered the most likely to fail. But few of the lenders on the list actually reach the point of failure. On average, just 13% of banks on the FDIC's problem list have been seized and shuttered by regulators.

The names of the banks on the list are never made available to the general public by regulators out of fear that depositors at those institutions may prompt a so-called "run on the bank.

Problems peaking? The FDIC also reported a much-needed increase in its deposit insurance fund, which covers customer deposits when a bank fails.

The fund grew by $145 million during the quarter -- the first increase in two years. It still continues to operate in the red however, reporting a deficit of $20.7 billion. That number also takes into account money the agency set aside in anticipation of future bank failures.

So far this year, 72 banks have failed. Bair said Thursday she expected that number to continue to climb, with smaller institutions among the most likely victims.

She noted however, that the agency was expecting the number of failures to peak at some point this year given that there are signs of improvement in some loan categories. She added that many troubled firms have been helped after locating new sources of capital.

Overall, the report painted a more healthy picture of the banking industry than a year ago.

Banks and other institutions insured by the FDIC collectively earned approximately $18 billion during the quarter. That's the highest profit since the first quarter of 2008 and was a more than three-fold increase from a year ago.

Much of that jump was attributed to big banks like Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), who returned to profitability in the latest quarter.

Another notable aspect of the latest quarterly report was a decline in the number of institutions insured by the FDIC to below 8,000. That's the first time that's happened in the agency's 76-year history. Two decades ago, the FDIC insured more than 16,000 institutions nationwide.

The latest reading on the health of the industry provided little boost to bank stocks Thursday, however.

The KBW Banking index fell more than 3% respectively in midday trading on broader fears about the European debt crisis and uncertainty regarding Wall Street reform efforts in Washington. To top of page

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