FDIC playing dangerous game of kick the can with problem banks, critic says

No less than 9% of the nation’s banks are in trouble and may fail, according to Federal Deposit Insurance Corp.

The FDIC doesn’t disclose which banks are most at risk, but based on data from it and other regulators, at least six are in New York City or its suburbs.

The deluge of what the FDIC kindly calls “problem” banks is threatening to overwhelm the agency’s resources and force it to allow sick institutions to fester, potentially delaying an economic recovery.

The FDIC reported Tuesday that 702 banks that collectively hold more than $400 billion in assets are problem institutions as of Dec. 31. That represents a 27% increase in just three months.

Since the beginning of last year, the government has seized 160 banks. As a result, its insurance fund has run up a deficit of nearly $21 billion as of Dec. 31, or more than double the previous quarter.

The FDIC uses the insurance fund to ensure depositors don’t suffer losses on their first $250,000 when regulators seize an ailing bank. The agency last year began requiring healthier banks to contribute more to replenish the insurance fund, but the costs of mopping up bank failures continues to weigh on it. The FDIC could call on taxpayers for a line of credit of up to $500 billion.

The growing deficit in deposit insurance is one reason why, despite the sea of troubled institutions, the agency hasn’t been even more aggressive in closing hobbled banks, according to research firm CreditSights. That means sick institutions are likely to languish and lend less to businesses and consumers.

“The FDIC is underfunded and thus less able to tackle in a timely way the resolution of troubled regional and community banks,” CreditSights analyst David Hendler wrote in a report Monday.

A spokesman said the FDIC is confident it has all the funding necessary.

Mr. Hendler accused regulators of hoping to “kick the can” — waiting for an economic recovery to ease the banking crisis. But he argued that many banks are so laden with troubled real estate loans that it will be difficult for them to recover even if the economy does. That makes it difficult for regulators to find healthier banks or private equity investors that are willing to buy troubled banks.

Most of the banks deemed problematic by the FDIC appear to be quite small, with average assets of about $600 million each. Filings from the FDIC and other banking regulators make it possible to figure out what area banks are considered vulnerable by the government.

USA Bank, a $225 million-asset institution in Port Chester, N.Y., was ordered to raise cash in December by the FDIC. The unprofitable bank has a “risk-based capital” ratio of 5.8% as of Dec. 31, which means it is “significantly undercapitalized” according to FDIC regulations. The bank did not return a call seeking comment.

Manhattan-based LibertyPointe Bank, which has $217 million in assets, has also been ordered to raise cash. Its risk-based capital ratio is just 4.3%, according to the latest data from bank regulators. Chief Executive Merton Corn said the bank is talking to potential investors.

Park Avenue Bank and Savoy Bank have also been ordered by the FDIC in the past year to cease risky business practices and improve performance. Both banks have said they would comply with the orders.

Also last year, the Office of the Comptroller of the Currency deemed Modern Bank of Manhattan to be in “troubled condition.”

Modern Bank’s president, Anthony Burke, said his bank has addressed regulators’ concerns by, among other things, drawing deposits from a wider range of sources. He hopes the OCC will find the bank in compliance at its fall examination.

The office also said that it found “unsafe and unsound banking practices” at Metropolitan National Bank. Officials at Metropolitan National could not be reached.

[This story first appeared in Crain’s New York Business, a sister publication of InvestmentNews.]