It's no secret that the financial sector is struggling. Even so, new figures from the Federal Deposit Insurance Corp.'s so-called secret list of troubled banks show an industry in increasing distress. The number of banks on the regulator's confidential watch list increased by 33% in the third quarter, to 552, the highest level in almost 16 years, the FDIC said Tuesday.

Worried about souring mortgages and other toxic assets, the more than 8,000 banks with deposits backed by the FDIC sharply raised the amount they set aside to cover loan losses, dampening their profitability. The agency keeps the names of banks on this list under wraps to protect them from debilitating runs by depositors, which could destabilize them further. However, the FDIC does publish aggregate figures derived from its examinations of their books.

Tough credit conditions persisted, with charge-offs and past-due loans reaching record highs, "and we expect that it will be at least a couple of more quarters before we see a meaningful improvement in that trend," said Chairman Sheila Bair in a statement.

In response, banks are cutting back on making new loans, the FDIC said. Total loans and leases on their books fell 2.8% during the quarter.

The troubled bank list represents 6.8% of all banks covered by the FDIC's deposit insurance fund, which safeguards accounts with $250,000 or less. Regulators have already closed 124 bank this year, including Colonial Bank, taken over by BB&T in August, which, with $25 billion in assets, ranks among the biggest banks failures in U.S. history.

The rapid growth of the FDIC's secret list points to more failures on the horizon. Indeed, more than 1,000 banks could ultimately face seizure by authorities before the financial industry's woes subside, according to research and consulting firm Institutional Risk Analytics, which provides data on lenders to clients ranging from private investors to the Securities and Exchange Commission.

A Record for Loan Charge-Offs and Delinquencies


Though the latest tally of banks on the brink tends to grab most of the attention, it comes as part of a quarterly update on lenders' financial health that provides plenty of other interesting information. FDIC-insured banks reported total profits of $2.8 billion in the third quarter, compared with $879 million a year earlier. That's less than they earned during the first three months of the year, but much better than the April-to-July period's $4.3 billion net loss.

All told, banks charged off $50.8 billion in loans, the most in the 26 years that the FDIC has been collecting such data. What's more, severely delinquent loans rose to $28.1 billion, also a record.

Of course, not every bank on the list ultimately fails, as Bair has taken pains to point out. But as long as the rolls of at-risk financial institutions continue to grow, the secret list is bound to have some very public members -- namely, those that do go bust.


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