The Problem Bank List Continues to Swell

The number of banks and thrifts on the "problem bank list" rose to 416 in Q2 2009, a large (but not surprising) jump from 305 in Q1 2009.

The "problem bank list" is a list of US banks and thrifts that are deemed to be in poor shape by regulators. Inclusion on the "problem bank list" means that a bank or thrift must take dramatic action to remedy their current situation or risk being taken over by the FDIC (Federal Deposit Insurance Corporation).

How does a bank find itself on the "problem bank list"?

Every 12-18 months, every bank and thrift in the United States is scrutinized by a number of examiners. Every aspect of the bank's current situation is taken into consideration - cash on hand, risk management policies, number of delinquent loans, etc.

The bank or thrift is then given a score out of 5, with 1 being the best and 5 being the worst.

If a bank or thrift receives a score of 4 or worse, then they are automatically included on the "problem bank list".

Banks or thrifts that receive poor scores are then told what they must do to remove themselves from the list, and what might happen if they don't.

A bank appearing on the "problem bank list" doesn't necessarily mean that they are going to fail - rather, it's simply a warning that changes must be made.

Also, a bank won't necessarily appear on the "problem bank list" prior to failing. For instance, a bank could see its financial position deteriorate so rapidly that they might go under in just a few short months. Given that banks are examined every 12-18 months, you can see why some banks might not appear on the list prior to failing.

The banks and thrifts that appear on the "problem bank list" are not made available to the public.

Why?

Regulators are looking to avoid bank runs that would likely result from this information being made public. These banks are already in a very precarious financial position, and a "run on the bank" would surely finish them off. This is why the information is not made public.

The number of banks on the "problem bank list" is at its highest point since June of 1994.

Many believe that Q2 2009 will represent the high water mark for the list, given that an economic recovery seems to be under way. I guess we'll have to see.

Filed under: The Economic Meltdown