US credit crunch widens to 117 banks

An official “watch list” of potentially troubled US banks has lengthened from 90 to 117 as the credit crunch wreaks havoc throughout the financial industry.

The Federal Deposit Insurance Corporation (FDIC), which guarantees customers’ money held in banks in the United States, said the quarterly list was the longest since mid-2003, and is asking its members to increase contributions to a dwindling bail-out fund.

“These are challenging times,” said the FDIC’s chair, Sheila Bair, at a press conference. “More banks will come on the list as credit problems worsen.”

So far this year, nine US banks have collapsed, including California’s IndyMac Bancorp, the third-largest failure of a high-street bank since the FDIC was created 75 years ago.

The FDIC does not disclose the identity of institutions on its watch list.

But it said the aggregate total of assets held by troubled banks had risen from $26-billion to $78-billion, partly because the FDIC seized control of $32-billion at IndyMac.

Profits at US banks fell 87% to $5-billion in the second quarter. Bair described the figures as “frankly, pretty dismal”. She added: “By any yardstick, it was another tough quarter. We continue to strongly encourage banks and institutions to ensure they have enough reserves to cover losses.”

Bair stressed that the public should remain confident in the banking system: “The overwhelming majority of banks — 98% of them — continue to be well capitalised by regulatory standards.”

In common with their larger competitors, regional US banks have been struggling to cope with a collapse in the value of mortgages and related securities.

On Friday, Kansas-based Columbian Bank and Trust became the latest institution to be shut down by the FDIC, which usually acts at the end of the week so that it can use the weekend to reorganise and begin looking for buyers. The first $100 000 of each customer’s deposit is guaranteed by the FDIC.

Chastening times have taken their toll on the FDIC’s resources. Its bail-out fund has dwindled from $53-billion to $45-billion. At 1,01% of insured deposits, this is below its target level of 1,15%. Under a “restoration plan”, banks will be asked to increase their contributions.

“We believe institutions can and will step up to the plate to provide whatever insurance funds are needed,” said Bair. The corporation is examining ways to get banks with riskier strategies to contribute at a higher rate.

The FDIC has increased the number of staff handling banking failures by 60% as it faces the most challenging environment since the savings and loan crisis of the late 1980s, which drove hundreds of small financial institutions out of business.

It has faced criticism after it emerged that IndyMac Bancorp was not placed on the watch list until a few weeks before its demise. —

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