8/26T3:00 FDIC notes...

A Problem (List) in Perspective
Last Update: 26-Aug-08 14:45 ET
With the Apollo 13 mission, the world knew Houston had a problem. By the same token, the world over knows the banking industry has some big problems these days as it grapples with the fallout from a depressed real estate market.

How bad is the problem? The latest data provided by Bloomberg shows credit losses driven by the housing depression are just over $500 billion worldwide. Increasingly, pundits are estimating credit losses will top $1 trillion before it is all said and done.
By region, the Americas accounts for half of the credit losses reported thus far, the lion's share of which have been made in the U.S.A.
A Depressed State
It's no surprise that the housing meltdown has been referred to as the worst crisis since the Great Depression. Of course, when one looks at the complete economic picture, the U.S. economy is nowhere close to that epic period when GDP fell 30%, unemployment exceeded 20%, wholesale prices declined 33% and industrial production plummeted close to 50% (source: FDIC).
One of the hallmarks of the Depression era was the large number of bank failures.
According to the FDIC, which was born out of that troubled era and which began insuring deposits in 1934, just over 4,000 commercial banks failed in 1933. Fortunately, that proved to be the peak for the period. Unfortunately, it wasn't the end of bank failures altogether.
Through the years, a multitude of banks have failed, yet the FDIC backstop has succeeded in preventing a repeat of the run-on-the-bank craze that precipitated so many bank failures during the Depression.
Fear Not
Bank failures nowadays have their roots in bad business decisions. The S&L crisis of the 1980s and early 1990s made that circumstance abundantly clear. In that pernicious period, there were 1600 bank failures and 1300 S&L failures.
Bad decision making, in turn, is coming home to roost now (no pun intended) as banks reap the risks of advocating some of the most lax mortgage underwriting guidelines imaginable and/or leveraging up to buy collateralized debt obligations backed by those mortgages.
To be sure, more than a few articles have been written chronicling this banking crisis. Read them long enough and you're at risk of getting the impression that the U.S. banking system is on the cusp of experiencing another massive wave of failures.
You'd do well to ignore such fear mongering.
Boo!
Every quarter the FDIC provides an update on the number of institutions that have hit its "Problem List." The latest report showed that number reached 117, having increased from 90 in the first quarter and marking the seventh consecutive quarter the number of institutions on the "Problem List" has increased.
That's not a favorable trend, but it isn't apocalyptic by any means either.
In 1991, with the S&L crisis in full bloom, the number of institutions on the Problem List hit 1,430 and accounted for $837 billion in industry assets. The 117 institutions currently on the list account for $78 billion in assets. That was up from $26 billion at the end of the first quarter, but $32 billion of the increase came from IndyMac Bank, which closed (i.e., failed) July 11.
For some perspective, consider that Citigroup alone reported $2.1 trillion in total assets at the end of the second quarter.
Year-to-date there have been 9 (not 90, but 9) actual bank failures. In fact, since 2000 there have been only 37 failures of FDIC-insured institutions.
Stronger regulatory oversight has played an important part in keeping that number down. The irony here, of course, is that regulators have been lambasted for sleeping on the job and allowing the recent mortgage crisis to balloon like it did.
Say what you will about the regulators, but know in the face of some scary-sounding reporting that the banking industry has an extremely long way to go before the number of failures in this trying episode rivals previous periods of great financial distress.