WASHINGTON — The Federal Deposit Insurance Corp. said Tuesday it reserved $10 billion in the second quarter to cover the costs of bank failures — a 2,000% increase over the first quarter.
The massive provision shaved 18 basis points off the Deposit Insurance Fund's reserve ratio, pushing it down to 1.01%, which in turn is expected to translate into steeply higher premiums for banks and thrifts next year.
The number of banks and thrifts on the FDIC's "problem" list jumped 30%, to 117, and their assets tripled, to $78.3 billion.
Unveiling its Quarterly Banking Profile Tuesday, the FDIC also said that industry profits fell 87% from a year earlier, to $5 billion, and chargeoff rates reached the highest level since the savings and loan crisis. "Quite frankly, the results were pretty dismal," FDIC Chairman Sheila Bair said during a press conference. "And we don't see a return to the record high earnings levels of previous years anytime soon. … We don't think this credit cycle has bottomed out."
IndyMac Bank's failure July 11 drove much of the decline in the insurance fund's ratio of reserves to insured deposits. Though the thrift failed after the second quarter ended, FDIC officials set aside $8.9 billion in preparation for its collapse. When the bank failed, the FDIC had estimated its resolution would cost $4 billion to $8 billion.
The $10 billion total reserve sliced the fund's total value by 14%, leaving it with $45 billion.
The 1.01% reserve ratio was the lowest since 1995, when the ratio would have stood at 0.98% if the bank and thrift funds had been combined then.
Once the ratio falls below 1.15%, the FDIC is required by law to establish a plan to return the fund to its minimum level within five years. Ms. Bair said the agency would consider such a plan in October — and she indicated that riskier institutions would pay more than others.
"We'll be proposing changes to the current assessment system that will shift a greater share of any assessment increase on to riskier institutions, so that safer institutions won't be unduly burdened," she said. "High-risk institutions that want to reduce their assessments can do so by improving their risk profiles."
The FDIC is currently charging most of the industry between 5 and 7 cents for every $100 of domestic deposits. Analysts have said the IndyMac failure could cause most banks' premiums to rise to between 10 and 15 basis points.
The industry has urged the FDIC to take its time in raising premiums, warning that steeper premiums in the current market environment could make the situation worse.
But Ms. Bair said: "I do believe we can do this in a way that does not harm the industry. … I think banks can and will step up to the plate."
When asked what factors would be used to refine the premium structure, she said it could include secured borrowing — which includes Federal Home Loan bank advances — as a risk factor. However, the overall goal is to ensure riskier institutions pay enough in premiums to "impact behavior."
More failures would also make the situation worse. Though only 27 institutions joined the troubled bank list, the growth in assets at those banks and thrifts was more dramatic, $52 billion.
The list does include IndyMac, which accounted for $32 billion of the increase in troubled bank assets. The other $20 billion indicates that some other large institutions have been added to the list. "More banks will come on the list as credit problems worsen, and the assets of problem institutions will also continue to rise," Ms. Bair said.
The earnings picture was equally bleak. The FDIC said loan-loss provisions were the most significant factor in the profit decline. The provisions increased fourfold from a year earlier, to $50.2 billion.
Still, the provisions did not keep pace with loan losses. The so-called coverage ratio dropped slightly to 88.5 cents for every dollar of noncurrent loans — a 15-year low.
The ratio remains low "because of the rapid rate at which loans are going bad," Ms. Bair said. "We expect that banks and thrifts will keep building up reserves for the next several quarters, and we continue to strongly encourage institutions to make sure that they have adequate reserves to cover their credit losses."
Other signs indicated troubles across the industry.
The average return on assets dropped 106 basis points from a year earlier, to 0.15%.
The agency said large banks were harder hit than small ones, but losses did not discriminate according to size. Nearly 18% of all institutions were unprofitable in the quarter, compared with only 9.8% a year earlier.
"Large institutions as a group had more substantial earnings erosion than smaller institutions, but downward earnings pressure was widely evident across the industry," according to the Quarterly Banking Profile.
Net chargeoffs nearly tripled, to $26.4 billion in the second quarter from a year earlier.
The annual rate of chargeoffs was 1.32% of total loans, the highest since the fourth quarter of 1991. A year earlier the rate was only 0.49%.
The amount of noncurrent loans and leases that were noncurrent rose for the ninth consecutive quarter, increasing by $26.7 billion. Increases occurred in all the major loan categories in the second quarter. The amount of noncurrent residential real estate loans increased by $11.7 billion, while noncurrent real estate construction and land development loans rose by $8.2 billion.
In addition, capital growth was relatively slow, the FDIC said. The industry added $10.6 billion to its regulatory capital in the second quarter — the smallest increase in almost five years. During the quarter 60% of banks reported declines in their total risk-based capital ratios.
Total assets at banks and thrifts dropped by $69 billion. The asset reduction, the first in eight years, was driven by a few large institutions, the FDIC said.
Assets in trading accounts declined by $118.9 billion in the second quarter after increasing by $135.2 billion in the first. The industry's residential mortgages fell by $61.4 billion in the second quarter after declining by $25.9 billion in the first.
Total deposits at insured institutions increased by only $6.9 billion in the quarter. Deposits in foreign offices increased by $46.8 billion, while deposits in domestic offices fell by $39.8 billion.
The number of institutions in the industry fell by 43 during the quarter, to 8,451 as of June 30. Twenty-four charters were added, while 64 were merged into other institutions.
Two banks failed during the second quarter.