Problem Bank List Continues to Increase in Size

The number of banks on the "problem bank list" climbed to 775 in Q1/2010, up from 702 the quarter before.

The question - is this good news or bad news?

The people in the "bad news" camp will point out that the number of banks on the list has consistently trended higher since the start of the "Great Recession" in December of 2007 (there were 305 banks on the list a year ago, and 702 banks on the list last quarter).

The people in the "good news" camp (which includes FDIC Chairman Sheila Bair) point out that the rise in problem institutions is starting to moderate, and that an increase of "just" 10% shows that the problems in the industry are starting to "subside".

The "problem bank list" is a list of banking institutions that the FDIC deems to be "troubled". These are banks that need to address some issues that they have or else they may end up failing.

What exactly is the "problem bank list"?

Banks are examined every 12-18 months by FDIC examiners. These examiners are there to inspect the banks and give them a rating of between 1-5, with 1 being the best mark and 5 being the worst.

A number of factors are used to determine the bank's "rating", including asset quality, capital levels and overall liquidity. The examiners will actively look for any number of red flags, including poor risk management policies, increasing delinquent loans, etc.

If a bank receives a rating of 4 or 5, then they are included on the "problem bank list". These banks are told what they must do to remedy their situations (eg increase capital, reduce number of delinquent loans, etc). If banks aren't able to fix their problems, then they run the risk of failing and being taken over by the FDIC.

A couple of notes:

-the names of the banks that are included on the "problem bank list" are NOT made available to the public, so don't bother looking

-inclusion on the "problem bank list" does not necessarily mean that a bank is destined to fail

-a bank does not necessarily have to be included on the list as a prerequisite to failing (during the darkest days of the economic crisis in 2008, some banks deteriorated so quickly that they failed before even being included on the "problem bank list", according to various reports)

Speaking of bank failures, at last glance there have been a total of 72 so far this year. In 2009 a total of 140 banks failed, up from 30 the year before. To give you some perspective, from 2005 to 2007, a total of three banks failed in the United States.

Which camp are you in? The "I'm afraid because the number of banks on the problem bank list keeps rising" camp, or the "I'm relieved because the number of banks on the problem bank list seems to be moderating" camp?

Source: Davemanuel.com - A History of Bank Failures in the United States

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