A recent government report on conditions in the U.S. banking system for the fourth quarter of 2009 indicates that while the economy may have troughed sometime in 2009, problems in the banking system may continue. Regulators do seem ready for this, however, and are preparing for more bank failures in 2010.

In Pictures: Top 7 Biggest Bank Failures

The Quarterly Banking Profile is issued by the Federal Deposit Insurance Corporation (FDIC) and covers credit conditions, capital strength and other statistics for banks insured by the FDIC. The report also outlines the conditions in the Deposit Insurance Fund that insures the $5.4 trillion in insured deposits at 8,022 institutions.

Break Even Quarter
The banking industry in aggregate earned only $914 million in the fourth quarter of 2009, but this was a relief compared to the loss of $ 37.8 billion in the same quarter of 2008. This rebound in net income for the industry was led by increases in several categories including trading revenues, servicing income and loan sales. The industry also benefited from a decline in non-interest expense due to a change in the method of accounting for goodwill and other intangible expenses.

Asset Quality And Capital Ratios
Capital ratios also improved on a year over year basis by $4.1 billion, or 0.3%. The total risk based capital ratio for all banks ended 2009 at 14.34%, while the tier one risk based capital ratio finished at 11.68%.

Asset quality deteriorated in the quarter in almost all categories measured by the FDIC. Net charge-offs were $53 billion, up 37%, and non-current loans were $391.3 billion, up 6.6%. A stunning 5.37% of all loans outstanding across the industry are now non-current according to the FDIC report, which essentially means loans that are more than 90 days past due are not being paid in proper fashion.

Problem List
This weak net income and loan problem is reflected in the increase in the number of banks on the "problem list" maintained by the FDIC. This is an internal list of troubled banks that have are rated 4 or 5 - the low end of the scale used by the FDIC. These banks require monitoring and are, "those institutions with financial, operational, or managerial weaknesses that threaten their continued financial viability."

There are now 702 banks on this problem list as of December 31st, 2009, with total assets of $403 billion. This was up from 252 banks with assets of $159 billion at end of 2008. (Learn what happens when your bank goes under in Bank Failure: Will Your Assets Be Protected?)

What About Your Bank?
So is the bank where you have you checking account or credit line on the problem list?

There is no way to tell because the list is kept secret and not disclosed to the public. The only way you will know is when you walk into your local branch on a Monday morning and do a double take as you see a new name over the door. While keeping the list secret seems to go against the trend towards open government, it is almost certain that disclosure would cause a panic among depositors at these institutions. This stampede to move deposits out would accelerate the failure and cost the Deposit Insurance Fund more money in the long run.

Past Problems
Possibly the largest bank that is a "problem" is Citigroup (NYSE:C), although the problems have appeared to peak and the bank is not officially on the list. Citigroup has received a tremendous amount of government assistance throughout the recession and financial crisis, and is now 27% owned by the U.S. government. (For further reading, check out Top 6 U.S. Government Financial Bailouts.)

Not all the banks on the problem list will fail. The problem list began 2009 with 252 banks on the list and ended the year with 702 banks. Along the way 140 banks failed during 2009.

Preparing For The Worst
The FDIC is not waiting for more bank failures to hit. It is preparing for more failures in 2010. The Deposit Insurance Fund is funded with assessments from member banks, along with a backup credit line from the U.S. Treasury.

In September 2009, the FDIC instituted a special assessment on member banks requiring them to prepay 13 quarters of assessments. This action raised $46 billion for the fund. The FDIC also instituted higher annual risk based assessment rates for member banks scheduled to go into effect in January 2011.

The Bottom Line
The banking system was ground zero of the credit crunch and financial crisis as many banks suffered from poor loan underwriting and falling investment value. The good news for Americans is that the FDIC is managing the crisis well and is prepared for further bank failures throughout 2010.

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