Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC), is working hard to reassure everyone that her banks, all 8,305 of them, are safe. Repeating her familiar mantra Wednesday on the CBS Morning Show, Bair said of FDIC-protected accounts, "Nobody's ever lost a penny of insured deposits."
Bair had good reason to be out on the stump. She knew that on Thursday the FDIC would release its report on the health of the country's savings institutions. Now the report is out, and you can sum up what it says about American banks in one word: sick. "There is no question that this is one of the most difficult periods we have encountered during the FDIC's 75 years of operation," said Bair, commenting on the report. (See pictures of the Top 10 scared traders.)
The vast majority of the nation's banks are still stable. But the report notes that 12 banks failed last quarter and a total of 25 failed last year. That was the highest number since 1993, when 50 failed. More disturbing, an additional 252 banks, representing $159 billion in assets, went on the FDIC's "problem list," up from 76 institutions, worth $22 billion, at the beginning of 2008. That increase is already translating into what could be a record number of bank failures in 2009. Already this year, 19 banks have failed.
Even for healthier banks, there's an unpleasant picture. In the fourth quarter of 2008, the nation's banks as a group lost $26.2 billion, compared with profits of $575 million for the fourth quarter of 2007. And though nearly half of the losses were concentrated in four big banks, one-third of all banks lost money in the fourth quarter, and only 36% reported year-over-year increases in quarterly earnings. The banks are clearly bracing for more bad news, setting aside more than 50% of their operating revenue to cover possible loan losses.
A higher rate of bank failures is increasing strain on the FDIC's resources. The agency's insurance-fund balance dropped by almost half in the fourth quarter, from $35 billion to $19 billion. To keep funds from dwindling, the FDIC is going to raise deposit-insurance assessment rates beginning in the second quarter of 2009, adding to the burden that already-troubled banks will have to bear.
For the nation's biggest banks, the U.S. Treasury is providing capital infusions and now a detailed stress test. Also, Citigroup announced on Friday the outline of a deal with Treasury to convert the government's holding of Citi preferred stock into common shares. The U.S. Treasury could end up owning more than 36% of the ailing bank. But confidence in the financial community remains low. Describing a vicious cycle of risk aversion, former Fed chief and current Obama adviser Paul Volcker told Congress's joint economic committee on Thursday that "an insecure bank faced with what it sees as insecure borrowers is not a very eager lender. It's a problem of lack of good borrowers, confident borrowers, as well as weak banks and worried bankers." Testifying before the House Committee on Financial Services, James K. Galbraith, an economist at the University of Texas at Austin, was more blunt about the government's capital infusions: "Stuffing the banks with money will not change their behavior."
On one front, however, the government's actions are paying off. Total deposits in the nation's banks increased in the fourth quarter by $307.9 billion as Americans poured their money into the safety of insured bank accounts. Now the question is, When will banks start to lend?