savings

Bank failures: How bad will it be?

Washington Mutual, Wachovia and National City are among the financial institutions that have announced huge losses and are looking for billions of dollars from private equity firms or others in the industry just to keep their doors open. In all likelihood, the bigger banks and savings and loan associations will survive the mortgage debacle and ensuing credit crunch, albeit somewhat battered and bruised.

But smaller banks may not fare as well, although it doesn't appear that we'll see a cascade of bank failures. Nevertheless, the increased risk has prompted the Federal Deposit Insurance Corp., or FDIC, to beef up its staffing in anticipation of banks going belly-up.

The FDIC insures approximately 8,500 institutions; 79 of them are on the agency's secret list of problem banks as of Dec. 31, 2007. Being on the problem list doesn't mean that a bank will fail; in fact, the agency says historically about 13 percent of banks on the list fail. The greater problem is that the damage done to financial institutions in 2007, and continuing through 2008 and perhaps beyond, may add many more names to the list.

U.S. bank failures 2003 to 2008
Bank nameClosing date

"When you get on that list it means the regulators are working more closely with you on a supervisory basis," says FDIC spokesman David Barr. "We're trying to work with the institution to recognize the problems and have them work out their difficulties so they get off the list."

Community banks are the institutions raising the most concern, because, some industry analysts say, they are the ones that may be at the most risk. But Karen Thomas, executive vice president for government relations at Independent Community Bankers of America, an organization representing 7,500 community banks, says that on balance, the group is in good shape.

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"The industry as a whole is coming off a period of record profits and strong liquidity. As a result, 99 percent of banks and thrifts remain well-capitalized and meet or exceed the highest regulatory capital standards. Community bankers are strong, responsible, commonsense lenders. They didn't cause this crisis and we expect them to weather this storm very well. They're looking at their asset quality and their loan portfolios and taking any actions that they deem are prudent."

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