Banks Failing at Fastest Rate Since S&L Crisis

(MoneyWatch)  The number of financially troubled banks is at the highest level since 1993, according to the FDIC's latest quarterly analysis. As of Sept. 30, the agency had 552 institutions on its "problem list," up significantly from 416 in the second quarter and not far below the 575 banks the FDIC categorized as shaky 16 years ago in wake of another large economic recession.

The speed and scale of the crisis reflects the huge number of toxic loans that continue to afflict banks. "For now, the credit adversity we have been discussing for some time remains with us, and we expect that it will be at least a couple of more quarters before we see a meaningful improvement in that trend," FDIC Chairman Sheila Bair said in a statement.

The pace at which banks are charging off problem loans and the rate of delinquencies rival what was seen just before the Savings & Loan crisis in the mid-1980s. Commercial and industrial borrowers are faring the worst, but bank customers of all types are hurting. Chargeoffs are also soaring for credit card, residential mortgages, home equity, and construction and development loans.

The result -- a huge surge in bank failures. Fifty banking companies went under durng the third quarter, the most since the second quarter of 1990, when 65 institutions collapsed. The FDIC has shuttered 124 banks this year, and experts expect hundreds more to fall.

This scourge is taxing the FDIC's Deposit Insurance Fund to the limit. And then some. At the end of September the fund had a -8.2 billion balance. That's the first time the DIF has slipped into negative territory since the S&L crisis. With loans continuing to deteriorate and many banks teetering on the edge, it also raises the question of whether the $45 billion the FDIC plans to raise from banks to replenish the fund will be sufficient or whether regulators will have to return to the well.

The agency's report card isn't a total dud. As a whole, the inudstry posted a net profit of $2.8 billion for the period, up from a loss of $4.3 billion in the second quarter. Driving that gain is growing revenue, a boost in deposits and interest income, and a strong rebound in bank stocks. Still, less than half of all banks reported higher quarterly earnings compared with a year ago, while in the third quarter more than a quarter of institutions were unprofitable.

The banking industry is healing. But slowly. That's no surprise, matching what we've seen following other major recessions. What's remarkable about this downturn is how widespread it is. Once confined to the biggest banks, the virus has infested every level of the industry. Many more banks wil die, even as the contagion starts to ease.