The agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses. Its deposit insurance fund dropped 20 percent, to $10.4 billion, its lowest level in nearly 16 years. And the number of “problem banks” increased to 416, from 305 in the first quarter, and is expected to remain high….
…The bulk of that decline comes from additional money that the agency has set aside to cover the cost of bank failures, and Ms. Bair said the fund had ample resources to make sure that insured depositors would not lose money. But the levels are so low that F.D.I.C. officials said Thursday that they would consider imposing a special assessment on the banks, on top of elevated insurance fees, toward the end of the third quarter. Through similar actions, it added about $9.1 billion to the fund in the second quarter.
In other words, without the special assessments, the FDIC would be very nearly completely broke right now. Now the government will not let the FDIC fail, so that isn’t anything to worry about. However, any special assessments made against the banks will dry up that much money that could have been loaned out by the banks.
That will continue to hobble the economy far into the future. That is why we are still very much in the woods, economically, right now. We also have not seen the Friday bank failures yet – and I’ll bet there will be some. Which means the FDIC funds will be depleted even further by Monday.
But as more banks fail and more consumer loans go sour and still more banks fail because of souring consumer loans and more credit is withdrawn from the market to shore up funds to support failed banks at some point we are going to hit the wall.
That is what I am worried about right now. There is much, much more in the pipeline. We are not in anything that really looks like a recovery – and will not be for some time to come.