Meltdown 101: Why banks' struggles have worsened

[August 29, 2009]  WASHINGTON (AP) -- Despite signs of an improving economy, the nation's banks are still struggling - in fact, the pace of bank failures has accelerated.

What would it take to turn the banking sector around? And what can people do to protect their savings in the meantime?

Here are some questions and answers about the wave of U.S. bank failures, as the latest quarterly snapshot of the industry painted a grim picture.

Q: How bad is this wave of failures?

A: A cascade of collapses began last year as the financial crisis struck.

Eighty-four banks have fallen so far this year as tumbling home prices and spiking unemployment pushed loan defaults upward. That's the largest number in a year since the early 1990s, at the apex of the savings and loan crisis. It compares with 25 bank failures last year and three in 2007.

The failures have sapped billions from the federal deposit insurance fund, which guarantees account holders' money when banks go under. The fund stood at $10.4 billion in the second quarter, its lowest point since 1992.

The biggest failure this year: Colonial Bank, a heavy regional lender in real estate development based in Montgomery, Ala., which became the sixth-largest bank failure in U.S. history on Aug. 14. The Federal Deposit Insurance Corp. seized Colonial and sold its $20 billion in deposits, 346 branches in five states and about $22 billion of its assets to BB&T Corp.

Some analysts believe another 100 to 300 banks could fail before the crisis runs its course, largely because of souring loans for commercial real estate. The number of institutions on the FDIC's internal "problem list" - those rated by examiners as having very low capital cushions against risk and other deficiencies - jumped to 416 at the end of June from 305 in the first quarter, the agency reported Thursday.

Q: What's behind this?

A: Banks around the country have run into trouble on their loans for construction and development, the fastest-growing category of troubled loans for U.S. banks, especially in overbuilt areas. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans.

Lots of banks have heavy concentrations of these loans in their lending portfolios, and some small banks are considered by regulators to be particularly vulnerable. Delinquent loan payments and defaults by commercial and residential developers have surged to the highest levels since the early 1990s, during the S&L crisis.

At the same time, some recent failures have been smaller banks brought down by garden-variety loans that have soured during the recession. Regulators say they're concerned about growing delinquencies on prime, conventional home loans.

Q: So even though the economy is starting to recover, banks are still struggling?

A: The condition of the banking industry is what economists call a lagging indicator: It falls behind the state of the economy because the problems take longer to percolate through banks, as opposed to other signposts such as consumer spending, gross domestic product or permits for building construction.

That means the pain will continue to weigh on the banking sector while the economy rebounds.

FDIC Chairman Sheila Bair offered a reminder on Thursday: "Banking industry performance is, as always, a lagging indicator."

Q: What will it take to turn the banking industry around?

A: Not much other than time, experts say.

"The only thing you could do is ... to ignore the losses that are already there," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington. That would be a terrible mistake, she said, noting that regulators' blind eye in the 1980s prolonged the S&L crisis.

"The best thing for the banking industry is just to take it on the chin and move on," she said.

Q: What about me? What can I do to protect my money in the bank?

A: Accounts are insured by the FDIC up to $250,000 per depositor per bank. Joint accounts are insured up to that amount for each co-owner of the account; individual retirement accounts, or IRAs, held in banks are also insured.

If you have multiple individual accounts at one bank, it's important to structure them carefully so they don't exceed the limits. The FDIC has a calculator on its Web site called the electronic deposit insurance estimator, or EDIE, that can help determine how much money in deposit accounts, if any, exceeds the insurance limits. You can find it here: http://tinyurl.com/lt3aok.

For any money in a failed bank's deposit accounts that exceeds the insured limits, you become essentially a creditor of the bank. You would eventually recover some of your money, but the amount can range from 40 cents on the dollar up to the full amount. Recovery of the money could take months.

[Associated Press; By MARCY GORDON]

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