FDIC: Failed Banks May Peak in 2010

'Problem Banks' List at 16-Year High; More Consolidation Expected More than 170 banking institutions failed in 2009, and that number may be exceeded in 2010, according to federal regulators and industry analysts.

The Federal Deposit Insurance Corporation (FDIC) this week announced that it had placed 702 financial institutions on its list of "problem" banks -- the highest number since 1993. Not all of them are destined to fail -- in fact, many will not -- but FDIC officials say that they expect failures to peak in 2010.

So far, 21 banks and credit unions have failed in 2010.

The cause of the continued failures? Collateral damage from the collapse of the credit bubble and the residential real estate bubble, says Jerry Blanchard, a partner in Bryan Cave's Financial Institutions Client Service Group. Bryan Cave has represented 18 banks in Georgia that have failed during the recession.

"The sunbelt, from California to Georgia, is overrepresented in the numbers, but you also see significant bank failures in other states such as Illinois," Blanchard says. "We expect that the number of bank failures will peak this year, and things will slowly get better after that."

Blanchard, a former associate general counsel at Bank of America, believes now is a great opportunity for investors to acquire insolvent financial institutions. "By providing loss-share agreements, the FDIC is basically back-stopping losses, which makes it very compelling to acquire troubled banks."

Despite the continued failures, there is hope on the horizon, says Christie Sciacca, a former FDIC official. "If coming out of the recession means unemployment will narrow by a measurable amount, then the industry should be fine," Sciacca says. "I suspect, however, that loan quality will not improve measurably until unemployment improves measurably." Sciacca now is an executive at LECG, a financial services industry consultancy.

Banks are lending at a minimum, as problem assets are worked out and recapitalization occurs, says Walter Mix, former California state banking regulator and now an executive at LECG. Most Cease and Desist Orders are for small and mid sized banks, Mix says -- another indicator of where these failures are occurring.

While some institutions have righted themselves, and large institutions are rewarding their top executives, many of the country's 8,000 banks are still under the gun when it comes to making a profit, according to the FDIC. In other related news, the FDIC says the Deposit Insurance Fund might have to cover $20 billion in additional losses by 2013.

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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