FDIC: "Problem Banks" Reach 13 Year High

The Federal Deposit Insurance Corp. said banks categorized as “problem” institutions increased 46 percent in the third quarter to the highest level in 13 years as the credit crisis battered the financial industry. The FDIC identified 171 problem banks as of Sept. 30, up from 117 in the second quarter and the highest since December 1995, the regulator said today in its quarterly report.,,, Banks are rated by regulators based on measures including asset quality, earnings and liquidity. They are ranked on a numerical scale, 1 being the highest and 5 the lowest. A bank with a rating of 4 or 5 is designated a problem.... “Declining asset quality is the main reason for the weakness in earnings,” said Bair, 54. The erosion was concentrated in residential mortgages and construction and development loans, she said. The banking industry wrote off $27.9 billion in loan losses at the end of September, an increase of 157 percent from the $10.9 billion reported in the third quarter a year earlier. Funds set aside to cover loan losses increased to $50.5 billion, more than triple the $16.8 billion reported in the year- earlier quarter. “Many institutions are aggressively growing their reserves,” Bair said. “But overall reserve growth continues to lag behind the growth in troubled loans.”