Bank Failures Top 100, but Public Remains Confident in Deposits

As the number of bank failures grows, the Federal Deposit Insurance Corp. (FDIC) is falling deeper into the red, but deposits at insured banks keep growing.

Six banks failed on Friday, bringing the total number of banks failed this year to 106. That's more than four times the amount of bank failures in 2008, and it's only October. Still, the number is dwarfed by the 534 failures seen in 1989 at the height of the savings-and-loan crisis.

"The number of failures we are experiencing is significantly lower than those the FDIC has handled during past crises," FDIC Chairwoman Sheila Bair said in a video message to depositors.

While bank failures have slowed in recent months from 2009's peak of 24 in July, that doesn't mean banks can breathe easy just yet. There is no pattern for bank failures from month to month, FDIC spokesman David Barr says.

"It's not a formulaic process," Barr told Money Morning, adding that the clip of bank failures "do ebb and flow."

The FDIC expects the current pace of bank failures to last through 2010.

Despite the rash of bank failures since the recession began in December 2007 and the fact that the FDIC insurance fund now has a negative balance, deposits are backed by the "full faith and credit" of the U.S. government.

Such a backing helps one of the FDIC's main priorities: maintaining the public's confidence. And from the looks of things – at least as far as bank deposits go – that confidence has withstood the worst financial crisis since the Great Depression. Insured deposits have grown almost $400 billion from the end of June 2008 to the end of June 2009, when deposits totaled more than $4.8 trillion.

"As evidenced by the stability of insured deposits throughout last year, this mission has been a success," FDIC spokesman Andrew Gray told The Associated Press.

So far, the FDIC has avoided tapping its $500 billion credit line with the U.S. Treasury. Earlier this year, it levied a $6.2 billion special assessment on banks to cover its insurance fund, and will likely have banks prepay their quarterly assessments for the next 13 quarters by the end of this year. The prepayment is expected to generate $45 billion.

Bad loans from the commercial real estate market will probably be the catalyst that keeps bank failures going.

Roughly $530 billion in mortgage-backed securities are due for refinancing between now and 2011, according to property researcher Foresight Analytics LLC. Foresight estimates that the U.S. banking sector could incur as much as $250 billion in commercial real estate losses, enough to cause as many as 700 banks to fail in that time.

News and Related Story Links:

• YouTube:
  A Message from FDIC Chairman Sheila C. Bair
• FDIC:
  Quarterly Banking Profile
• The Associated Press:
  Bank Failures Hit 106 for Year; Many More Are Weak
• Money Morning:
  Banks Satisfied On FDIC Decision, but Will They Still Lend?