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Friday, 29 August 2008

Over 100 US banks in trouble

WASHINGTON: The number of troubled United States banks shot up 30 per cent in just three months to 117, the highest level in five years.

A top regulator also warned that conditions will worsen as the housing slump and credit crisis continue to pound the industry.

More than a year after the credit crisis first flared up, Ms Sheila Bair, chairman of the Federal Deposit Insurance Corp (FDIC), warned on Tuesday that the outlook for the ailing banking industry was bad - and getting worse.

With the swelling tide of toxic loans proving to be even more worrisome than feared, Ms Bair said she expected more banks to join the agency's watch list of problem banks.

'We don't think the credit cycle has bottomed out yet,' she told a quarterly news conference, adding that US banks will not return to high levels of earnings any time soon.

'We expect that banks and thrifts will keep building up reserves for the next several quarters,' she said.

The news pulled down financial shares before markets closed higher on the back of a surge in energy shares.

Nine American banks have failed so far this year. They include mortgage lender IndyMac Bancorp, which has drained the FDIC's Deposit Insurance Fund used to repay insured deposits at failed banks.

In a bid to replenish the US$45.2 billion (S$64.4 billion) fund, Ms Bair said the

FDIC will consider a plan in October to raise the premium rates that banks pay into the fund. Such a move will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other US banks, Ms Bair said, to encourage safer business practices.

Mr Charlie Peabody, a bank analyst at Portales Partners in New York, said such a weighted tax could hurt already troubled banks past the point of recovery.

'The tax will fall most heavily on the weakest, so the conclusion is, the weak are going to get weaker and the strong will be able to take advantage of the weak,' he said.

Ms Bair said 98 per cent of the 8,500 US banks continued to be well-capitalised. She also noted that the banking sector's exposure to the preferred securities of mortgage giants Fannie Mae and Freddie Mac was 'not problematic', but said some smaller institutions' exposure could cause them greater stress.

The agency said the majority of new banks on the problem list have landed there because of major exposure in commercial real estate, whereas before, the problem banks were distressed by residential products.

The FDIC said it continued to see stress in the commercial real estate market, especially in construction and development areas.

Delinquent loans - those more than 90 days past due - jumped by almost 20 per cent during the quarter to US$162.9 billion, it said.

IndyMac is now expected to cost the fund US$8.9 billion, topping the agency's prior estimates of US$4 billion to US$8 billion, the FDIC said.

REUTERS, NEW YORK TIMES

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