Putting Money in the Bank

US banks are apparently in much riskier positions overall than even some of the pessimists may have thought. According to an article in the Financial Times, statistics from the FDIC are not looking good:

• The agency says that net income for the entire industry during last year's fourth quarter was not $5.8 billion as previously thought, but $646 million. The downward revision was the result of bank financial restatements, presumably as they wrote off the billions of dollars of imaginary profits and bad loans.


• "Problem" banks have risen from 76 to 90 in number, although that is still a lot lower than during the S&L crisis in the 80s and 90s, when a full 10 percent of banks fell into that category. Their combined assets are $26.3 billion, or about $292 million on average. That is diddly for a financial institution, even a relatively small one.


• So far this year, three banks have failed. Even in last year's turmoil, three failed total, and none failed in the two years prior. The FDIC expects additional failures.


• The coverage ratio - or amount of cash on-hand compared to the total dollar amount of loans that are 90 days or more overdue - has dropped for the eight straight quarter. It's now 89 cents in reserve for every dollar. That's the lowest level since some time in 1993.

According to a quote in the FT, the FDIC is not happy:

“This is the kind of thing that gives regulators heartburn,” said Ms Bair. “We also want them to beef up their capital cushions beyond regulatory minimums given uncertainty about the housing markets and the economy . . . It’s only prudent to be building up capital at a time like this."

There are three reasons I can see that banks may not be putting away enough money: they underestimated how bad things were, they continue to engage in overly risky behavior, or the rate at which loans are going bad is continuing to escalate and every time they think they know what's going on, reality intrudes. My bet is that it's some combination.