The number of banks on the Federal Deposit Insurance Corp’s list of banks most at risk to fail has dropped in the second quarter of 2011. This is the first drop in five years. While growth is indicated, it has been slow, and the FDIC remains cautious.
‘Problem’ banks down by 23
The FDIC announced Tuesday that the number of banks tracked on its confidential “problem” list has dropped in the second quarter to 865. That figure was 888 in the first quarter. This is the first such decrease since the third quarter of 2006.
“Problem banks,” as defined by the FDIC, are those believed to not have enough capital to absorb potential risks. It is not a predictor that those banks will fail, but is a gauge of the health of the banking industry.
Other signs of growth
Other indicators also point to renewed growth in the financial industry. Sixty-eight banks have failed this year, a huge drop from 157 last year. The banking industry earned $28.8 billion in the second quarter. That figure is up from $20.9 billion reported in the second quarter of 2010. Also, the FDIC insurance fund grew from negative $1 billion last quarter to the current $3.9 billion.
Not out of the woods
Although the list of problem banks is lower than it has been, it still stands at roughly 11.5 percent of all federally insured banks, or about 1 in 9. If the economy suffers a double-dip recession, as some have predicted, many of those banks will likely fail.
Martin J. Gruenberg, chairman of the FDIC, said in a statement:
“These trends are obviously favorable, but the current levels of both failures and ‘problem’ institutions remain very high by historical standards.”
Larger banks feel the pinch
While the banks that have closed this year were mostly smaller banks tied to loans for commercial property and development — industries that have suffered huge losses — many large banks are also feeling the pinch. Although earnings are up, those figures are still far lower than the ones touted in pre-recession years.
Many large banks have downsized in the second quarter. Goldman Sachs, Bank of New York Mellon, State Street and Bank of America have all reported large rounds of layoffs.