I have been talking about the possibility of a huge wave of bank failures for a long time. Recent references include Citigroup VIEs Raise Question Of Solvency, and Wave of Bank Failures is Coming.

Even the Fed is in on the act. Please consider FDIC Adds Staff as Bank Failures Loom.

The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation’s housing and credit markets continue to worsen.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

“Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia,” said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

Quarterly Banking Profile

The Fourth Quarter FDIC Banking Profile is looking mighty bleak.
Here are the highlights:

Quarterly Net Income Declines to a 16-Year Low

Fourth-quarter net income of $5.8 billion was the lowest amount reported by the industry since the fourth quarter of 1991, when earnings totaled $3.2 billion. It was $29.4 billion (83.5 percent) less than insured institutions earned in the fourth quarter of 2006. The average return on assets (ROA) in the quarter was 0.18 percent, down from 1.20 percent a year earlier.

This is the lowest quarterly ROA since the fourth quarter of 1990, when it was a negative 0.19 percent. Insured institutions set aside a record $31.3 billion in provisions for loan losses in the fourth quarter, more than three times the $9.8 billion they set aside in the fourth quarter of 2006.

Trading losses totaled $10.6 billion, marking the first time that the industry has posted a quarterly net trading loss. In the fourth quarter of 2006, the industry had trading revenue of $4.0 billion. Expenses for goodwill and other intangibles totaled $7.4 billion, compared to $1.6 billion a year earlier.

One in Four Large Institutions Lost Money in the Fourth Quarter

More than half of all institutions (51.2 percent) reported lower net income than in the fourth quarter of 2006, and 57.1 percent reported lower quarterly ROAs.

One out of every four institutions with assets greater than $10 billion reported a net loss for the fourth quarter. Institutions associated with subprime mortgage lending operations and institutions engaged in significant trading activity were among those reporting the largest earnings declines.

Net Charge-Off Rate Rises to Five-Year High

Net charge-offs registered a sharp increase in the fourth quarter, rising to $16.2 billion, compared to $8.5 billion in the fourth quarter of 2006.

The report also shows the number of problem institutions is 76 as compared to 50 in 2006. Insured deposits total $4.29 Trillion as compared to $52.4 billion in deposit insurance. Here is a chart in the report that caught my eye.

Estimated FDIC-Insured Deposits by Type of Institution

click on chart for sharper image

Notice the discrepancy between total assets, domestic deposits, and insured deposits. That’s a huge potential disaster for someone. I recommend getting while the getting is still good. Anyone over the FDIC limit is likely to get hammered. Don’t let it be you.

Mike “Mish” Shedlock
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