WASHINGTON – Bank failures and preparation for further collapses drove the Deposit Insurance Fund's reserve ratio down by 18 basis points, to 1.01%, during the second quarter, leaving banks facing the prospect of steep premiums next year.
The news, released this afternoon by the Federal Deposit Insurance Corp., came amid a pile of other poor indicators that showed just how poorly banks have fared during the housing crisis. Earnings fell 87%, to $5 billion, from a year earlier, while the rate of charge-offs reached their highest level since the savings and loan crisis.
The number of problem institutions jumped 30%, to 117, while assets of those banks and thrifts tripled to $78.3 billion.
"Quite frankly, the results were pretty dismal," said FDIC Chairman Sheila Bair, according to the text of remarks she was expected to make during a press conference this afternoon. "And we don't see a return to the record high earnings levels of previous years anytime soon."
The collapse of IndyMac on July 11 drove much of the decline in the DIF's ratio of reserves to insured deposits. The failure, the largest ever for a thrift, is expected to cost between $4 billion and $8 billion. Though it failed after the second quarter closed, FDIC officials had removed money from federal reserves in preparation for the collapse.
The FDIC set aside $10 billion in the second quarter for future failures – including IndyMac – a nearly 2,000% increase from March 31.
As a result, the level of reserves fell to $45 billion, a 20% decline from the first quarter.
Once the reserve ratio falls below 1.15%, the agency is required by law to establish a restoration plan that returns the fund to its minimum level within five years.
Ms. Bair said the agency would consider such a plan in October – and indicated that a larger burden of higher premiums would fall on riskier institutions.
"We'll be proposing changes to the current assessment system that will shift a greater share of any assessment increase onto riskier institutions, so that safer institutions won't be unduly burdened," Ms. Bair said. "High-risk institutions that want to reduce their assessments can do so my improving their risk profiles."
The agency is currently charging most of the industry between 5 and 7 cents per $100 of domestic deposits. After the failure of IndyMac, analysts said it could cause most banks to pay between 10 to 15 basis points in premiums.
More failures will also make the situation worse. Though only 27 institutions joined the troubled bank list, assets at those banks and thrifts were dramatically higher.
The list does include IndyMac, which accounted for $32 billion of the $52 billion increase in troubled bank assets. Still, the remaining $20 billion increase indicated some larger institutions had 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 behind the earnings decline. They totaled $50.2 billion for the quarter – a four-fold increase from a year earlier.
Still, the higher provisions did not keep pace with loan losses. The so-called "coverage ratio" dropped slightly to 88.5 cents per $1.00 of noncurrent loans, a 15-year ratio 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 to 0.15%, compared with 1.21% a year earlier.
The agency said large banks saw their earnings decline further than smaller institutions, but losses did not discriminate based on 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," the agency said in its Quarterly Banking Profile.