Mortgage Daily Logo
mortgage news from industry experts

Stark Warnings From FDIC Chief

The chairman of the Federal Deposit Insurance Corporation warned that the market downturn is far from over, more banks will become troubled and more will fail. She also laid out a number of early signs of problem institutions.

FDIC Chairman Sheila Bair made the comments in a presentation before the Florida Bankers Association yesterday, according to a transcript of her speech.

She noted dismal second-quarter banking sector result were due to declining non-interest income, rising non-interest expense, declining gains on securities sales and mounting loss provisions. But the biggest factor was expenses for credit losses.

While one-third of operating revenue was devoted to building up reserves, the sector’s coverage ratio remains at a 15-year low because of the rapid rate at which loans are going bad.

The FDIC chief also warned that banks must get their balance sheets in order.

“You simply must accept that the credit downturn is far from over,” she said. “It’s a tough slog but there’s no easy way out.”

Residential loans were responsible for the biggest share of the increase in troubled loans, but construction loans were the fastest-growing category. She noted 18 percent of banks were unprofitable in the second quarter, compared with 10 percent a year ago.

There were 117 institutions on the “problem list” as of June 30, the highest since mid-2003, and the list is growing. Assets at problem banks increased from $26 billion to $78 billion — with $32 billion of the increase coming from failed IndyMac Bank.

And more banks are expected to fail, with the number reaching 10 so far this year.

“We will certainly see more banks fail,” she stated.

But Bair said 98 percent of institutions are well-capitalized.

She explained that early signs of a problem bank include rapid asset growth funded by potentially volatile liabilities, a reliance on large depositors and concentrated funding sources, and offering rates significantly above the local deposit market and through Internet sites. Other signs include negative publicity, a decline in asset quality or earnings performance, and counter-parties who increase collateral requirements.

Bair also warned about relying on brokered deposits, which she said will be scrutinized more closely going forward at borderline institutions.

Popular posts

How Long Does It Take to Refinance a Mortgage
How Long Does It Take to Refinance a Mortgage

So, you’re interested in refinancing your mortgage. Maybe you want some extra capital to do that home project you’ve always dreamed of, interest rates are nearing record lows, or you want to start consolidating debt. Regardless of the motivation behind the refinance,...

How Does Refinancing a Mortgage Work
How Does Refinancing a Mortgage Work

A home purchase is considered an investment, and a robust one at that. Savvy owners are constantly looking for new ways to reduce debt, save money, pay less in interest, and ultimately build equity. Refinancing is one way to leverage your investment and do just that....

What Does It Mean to Refinance Your Home
What Does It Mean to Refinance Your Home

You can think of refinancing your mortgage as a debt redo. Essentially, you’ll swap out the existing loan for a new one - ideally with better terms and conditions. Only this time it could help you save money on high mortgage payments, rather than just borrow it....

Setting up the Utilities in My New House
Setting up the Utilities in My New House

All the tedious, time-consuming home closing documents have been signed, sealed, and delivered. Your belongings are packed into what seems like a million boxes and you have a solid plan to haul all your existing furniture to the new place. Just as your boxes and...

When Is My First Mortgage Payment Due?
When Is My First Mortgage Payment Due?

Navigating your way through a brand new mortgage loan can be a difficult task, especially for first time homeowners. After handing over a large sum of money for the down payment and closing costs, it’s important to pay attention to the timing of your first mortgage...


Don’t worry, we don’t spam

calculate your monthly mortgage payment

Related Topics

Helpful Links

Daily mortgage rate trends

Best mortgage lenders

First-time homebuyers programs by state

Loan limits by state

Types of mortgages

APR vs interest rate

Understanding PMI

Related Posts