Transcripts

The State of the Nation's Banks... Dismal

JEFF YASTINE: The number of troubled U.S. banks is at its highest level in five years. Today, the chairman of the FDIC, the Federal Deposit Insurance Corporation, said there are now 117 problem banks, up about 30 percent in the second quarter and she expects more banks to join that list. So far, nine American banks have failed this year. As Darren Gersh reports, the cost of those failures has the FDIC considering changing its requirements for banks.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In one word, FDIC Chairman Sheila Bair summed up the banking industry's spring performance -- dismal. So bad, the Federal deposit insurance fund lost $7.6 billion, forcing Bair to announce the FDIC would soon consider plans to charge banks more to back their deposits.

SHEILA BAIR, CHAIRMAN, FDIC: I do believe we can do this in a way that will not be harmful to the industry. A strong deposit insurance fund strengthens the industry because it strengthens public confidence and depositor confidence in our banks.

GERSH: The FDIC says now that it has taken a closer look at Indymac bank, it expects to lose $8.9 billion on the government takeover. That's about a billion more than estimated after the bank failed last month. With all the losses, policy analyst Jaret Seiberg expects the FDIC will be forced to triple or quadruple the premiums it charges banks, which works out to a $7 to $10 billion hit.

JARET SEIBERG, POLICY ANALYST, STANFORD GROUP: There isn't a doubt -- you raise the price in this environment, it's going to be painful. But it's medicine they probably have no choice but to take.

GERSH: With bank failures rising, the FDIC clearly needs the money. Its list of problem banks jumped from 90 to 117 in the second quarter. The assets held by institutions on that problem list tripled, rising from $26 billion to $78 billion. If there is good news in this story, the FDIC says it's that 98 percent of banks still meet or exceed the highest regulatory capital standards. While that's true, analysts still expect many more bank failures. At Institutional Risk Analytics, Christopher Whalen offers what might be considered the worst-case scenario.

CHRISTOPHER WHALEN, MANAGING DIRECTOR, INSTITUTIONAL RISK ANALYTICS: We've got an estimate of 110 banks, $850 some odd billion in assets, failed by next year. So that's less than 10 percent of the industry. It's a severe crisis. It's much worse than the early '90s and I think the variable is how long do we continue to see loss rates go up.

GERSH: It's very clear after listening to the FDIC today that banks are going to have less cash to lend. Not only are banks going to pay more to insure their deposits, the FDIC also says bank domestic deposits shrank by $40 billion in the second quarter, the biggest decline in six years. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.