Wednesday 3rd of March 2021

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U.S. Bank Insurance Fund Ends Quarter In Red

For the second time in history, the government fund set up to insure bank deposits in the United States ran out of money at the end of the third quarter.

During the quarter ending Sept. 30 that accounted for 50 banks failure, the Federal Deposit Insurance Corp. began preparing for more bad news among financial institutions by setting aside $21.7 billion to cover any additional institution collapses. As a result, the fund during the quarter fell from $18.6 billion to negative $8.2 billion.

The FDIC is responsible for covering the more than $4.5 trillion in deposits.

Earlier, the agency told banks that it wants them to prepay their $45 billion in assessments by the end of this year to help cover the costs of protecting the deposits of banks expected to fail next year.

The list of “problem” banks compiled by the FDIC grew to 552 at the end of September. That’s the highest total in 16 years and even more than the 416 reported at the end of Q2. The agency does not release the names of institutions that are on the list.

However, it did give a hint. Small institutions, especially those that were heavily invested in commercial real estate as that market crumbled, were prominent on the list.

The 50 U.S. banks that failed in the Q3 was not a record. The largest number for a quarter occurred in 1990’s second quarter when 55 went under.

But the news was not all bad in the industry. Banks still reported a $2.8 billion profit in the third quarter, up from the loss of $4.3 billion at the end of Q2 and more than three times the $879 million in last year’s Q3.

Credited for the improvement was the recovery of securities portfolios. Also, those banks with less than $10 billion in assets reported better margins.

Profit, however, did not mean there was more activity in the credit market. Loan balances were down a record 2.8 percent as they fell to $210.4 billion. The reasons were there was less demand for loans and banks were cautious about granting credit.

All categories of loans were down, with balances in commercial and industrial lending plunging 6.5 percent to $89.1 billion. “There is no question that credit availability is an important issue for the economic recovery,” FDIC Chairman Sheila Bair said. “We need to see banks making more loans to their business customers.”

She added that profitability isn’t expected for the financial industry for the current quarter. There is expectation that loan charge-offs likely will experience the usual end-of-the-year increase. “I wouldn’t read too much into this quarter,” she said.