Banks Under Stress Climb On News Of Bad Loans

By: Rob Adams
Staff Writer
Published: Mar 11, 2010

America's banks under stress as news of foreclosures and bad loans continue to rise.

The number of banks under stress is growing. It was bad mortgage loans to risky borrowers that brought down financial institutions such as Washington Mutual Bank. While many have been bailed out, the list of negative loans continues to grow.

"Recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets," FDIC Chairman Sheila Bair said in the FDIC's quarterly summary.

However, it is growing slowly, though it's still not good news for the economy. The reason numbers have not been growing quickly is partly due because the FDIC has already closed to many failed banks. That study comes via the Investigative Reporting Workshop at American University in Washington.

The bad loans continue to weigh on lenders. The FDIC closed 140 failed lenders in 2009, including 45 in the fourth quarter. Nearly all had very high levels of bad loans.

Meanwhile, the IRW's report stated that at the end of December, a total of 389 banks had "troubled asset ratios" above 100. That is a slight rise from 369 in September. Troubled assets are defined to include loans that are 90 days or more in arrears, loans on which the bank is no longer collecting interest and real estate the bank already owns, generally through foreclosure.

A ratio above 100 means a bank had more troubled loans than money available to cover potential losses due to defaults. The number of banks with ratios above 100 has risen from 24 at the end of 2007 to 163 in the last quarter of 2008 and the 389 noted above. It is astounding.

Troubled Asset Ratios Climb 4.9 Percent

Meanwhile, due to bank closures and mergers, the number of banks has fallen from 8,542 at the end of 2007 to 8,008 at the end of 2009. Given that, the percentage of lenders with high troubled asset ratios has climbed 4.9 percent, or one out of every 20. The rising troubled asset ratios show the increasing pressure that the recession and bad loans, particularly on commercial real estate, have placed on the nation's banks.

While the troubled asset ratio is not a predictor of bank failure, most of the banks that have failed do have high ratios. Even so, the financial institutions can recover, as borrowers resume making scheduled payments or the bank can raise more capital. Depositors are insured by the FDIC even when the bank does fail.

FDIC Protection

However, the FDIC protection has its limits. The basic limit had been $100,000 per depositor per bank but has been increased to $250,000 through Dec. 31, 2013. The FDIC has more detailed information and a calculator to help you determine your level of protection.

If your deposits are less than the FDIC limits, you're protected, even if your bank should fail. However, if your deposits exceed those limits, you can move deposits into smaller accounts at more than one FDIC insured bank. It is not a good idea to create multiple accounts with the same bank.