Bank failures set to peak in 2010, FDIC says.

02/24/2010 9:37 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Yesterday, February 24, the FDIC (Federal Deposit Insurance Corp.) announced that its list of problem banks hit 702, at the end of December. That’s the highest level since 1993.

But, if we’re lucky and the economy doesn’t take a step backward this year, the number of bank failures will peak in 2010, the FDIC said. About 140 banks failed in 2009.

Not all those banks will go under but if they fail at recent rates and the average 23% loss rate on assets (since 2007) holds up, the FDIC is looking at having to absorb about $92 billion in losses on the $403 billion in assets at the 703 banks on its problem list between now and 2013, the FDIC projects. The FDIC currently has $66 billion in cash and liquid securities on hand. The agency has recently used special assessments on banks to build up its balances and that’s a likely source of cash if the FDIC needs a top up.

Another special assessment—the FDIC raised $5.6 billion from banks last fall—would take another bite out of banking industry profits. According to Keefe, Bruyette & Woods, the banking industry as a whole showed a profit of just $914 million for the fourth quarter of 2009.

Which highlights something very interesting about the FDIC list.

In the early stages of the financial crisis, the worry was about big banks such as Citigroup (C) and Bank of America (BAC), which needed taxpayer capital, and Wachovia and Washington Mutual, which needed government urged acquisitions by other big banks.

These were big banks and I mean big. Bank of America finished 2009 with about $2.2 trillion in assets.

The current stage of the financial crisis is about smaller banks. Much smaller banks.

Remember that the 702 banks on the FDIC list of problem banks had combined assets of $403 billion. That works out to an average of just $574 million per troubled bank.

The smaller size of the current round of problem banks means that none are too big to fail. None have the potential to bring down the financial system if they go under.

But that doesn’t mean they aren’t important. Smaller banks provide the bulk of commercial loans across the country and trouble in this sector has a disproportionately large effect on small businesses and local real commercial real estate projects.

The global financial system may be safer these days but the troubles in the local economies served by the smaller of the nation’s 8,000 banks are by no means over. And since the national economy is really just the sum of all these local economies trouble on that level means that the national banking crisis isn’t over either.

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