FDIC’s ‘Problem’ List Shrinks for First Time Since 2006

The Federal Deposit Insurance Corp.’s list of “problem” banks fell in the second quarter for the first time since 2006 as the industry’s income improved and costs tied to bad loans eased.

The confidential list of banks deemed at greater risk of collapse shrank by 23 firms to 865, the FDIC said today in its Quarterly Banking Profile. The last time that happened was the third quarter of 2006 before the credit crisis began, the agency said. Net income rose 38 percent to $28.8 billion from a year earlier, the eighth consecutive quarterly improvement, boosted by a seventh straight drop in provisions for bad loans.

“Banks have continued to make gradual but steady progress in recovering from the financial market turmoil and severe recession that unfolded from 2007 through 2009,” Martin Gruenberg, the FDIC’s acting chairman, said today in a statement.

The FDIC defines “problem” institutions as those with financial, operational or managerial weaknesses that threaten their viability.

Lenders put aside 53 percent less money to cover bad loans and charge-offs dropped 42 percent. The $20.9 billion decline in charge-offs was the largest since the recovery in credit quality began, the FDIC said.

In the Black

The deposit insurance fund, which protects customer holdings up to $250,000 per account in the event of a failure, was positive for the first time in two years, the agency said.

The fund, which had been depleted by a wave of bank failures stemming from the collapse of the U.S. housing market, rose to $3.9 billion, because of fewer expected bank failures and assessment revenue, the agency said. The FDIC insures deposits at more than 7,500 banks and thrifts.

The agency is prepared to deal with dismantling any lenders that fail if the need arises, Gruenberg said at a news conference in Washington, citing new authority granted by the Dodd-Frank regulatory overhaul. The Dodd-Frank Act requires the FDIC to craft regulations including the so-called living wills rule, which would force systemically risky firms to spell out how they can be unwound in the event of a collapse.

While loan balances increased, net operating revenue declined for a second consecutive quarter, falling 1.8 percent as banks struggled with the effects of a slowing economy and low yields on assets. Net interest margins were lower than a year earlier at nine of the 10 largest banks, the agency said.

Ducking for Cover

Investors have shunned bank stocks, pushing the 24-company KBW Bank Index (BKX) down more than 30 percent this year, on concern that profit and dividends will be pinched by weak revenue and demands from regulators that lender hold more capital to protect against losses.

“Banks are ducking for cover partly because of market volatility and partly because of there is no other way to comply with the new capital and liquidity rules,” said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc.

Twenty-two lenders collapsed during the quarter, the fewest since the first quarter of 2009, the agency said. The FDIC didn’t specify how the change in the problem bank list may have been affected by failures or mergers. There’s no direct correlation between the number of failures and the size of the list, according to Andrew Gray, an FDIC spokesman.

“It’s a snapshot in time that includes some failures, mergers and migration,” he said.

The agency did provide a tally of total assets held by problem banks, which declined to $372 billion from $397 billion.

To contact the reporter on this story: Meera Louis in Washington at mlouis1@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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