Troubled banks must tighten lending standards

McClatchy Newspapers

CHICAGO — The growing number of troubled banks is forcing regulators to shore up deposit-insurance reserves, which in turn is going to cost consumers more in the form of fees and tighter lending standards.

On Thursday, the Federal Deposit Insurance Corp. said that the number of distressed banks is at its highest level in 15 years and that 20 percent of the Deposit Insurance Fund was lost in the second quarter.

The DIF, a private, industry-sponsored insurance company that the FDIC manages and is considered a backstop for the insured deposits, fell to $10.4 billion — it’s lowest level since March 2003. The FDIC insures up to $250,000 per account.

To shore up those reserves, the FDIC is likely to tap banks again with a special assessment, according to FDIC Chairwoman Sheila Bair. In May, the FDIC levied a charge on banks’ assets — 5 cents for every $100 in assets — payable by Sept. 30. It’s likely that a new assessment, which is effectively an insurance premium, would mirror that.

To recover those assessments, banks will look at raising fees on credit, checking, ATMs and other services. Banks have been steadily raising fees for 10 years and don’t appear to be slowing down.

“That trend has kicked into overdrive lately,” said Greg McBride, senior analyst at Bankrate.com. “I’m not sure you’re going to see a direct correlation to [the assessments], but the bottom line is that fees are going to go up.”

Banks also are likely to raise interest rates on consumer loans, lower interest rates on deposits and enforce stricter lending standards. “The more money that banks are assessed to replenish the FDIC, the less that’s available to be lent out,” McBride said. “It’ll make it even more difficult for borrowers of marginal credit quality to get a loan,” he said.

The FDIC said that the number of troubled banks climbed to 416 at the end of June from 305 at March’s end. Yet more than 96 percent of banks—holding more than 98 percent of the industry’s assets — are still classified as “well capitalized,” according to James Chessen, chief economist of the American Bankers Association.

“The banking industry continues to provide the financial backstop for the FDIC and will pay nearly $18 billion in premiums in 2009 to cover losses from bank failures,” Chessen said. “The industry is committed to maintaining the strength of the deposit insurance fund.”

Though the fund is shrinking, deposits at all banks, healthy and problematic, are still quite safe. Bair called the reserves “ample,” but the FDIC can turn to the U.S. Treasury for a loan — which banks would have to repay — should the fund fall into the red, as many industry experts fear.

In the 75-year history of the FDIC, “no insured depositor has ever lost a penny of insured deposits ... and no one ever will,” Bair said.