Eroding Loss Coverage at Banks a “Worrisome Trend,” FDIC Says

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation continued to see their loss coverage ratios erode during the first quarter, despite ever-increasing provisions for expected loan losses — a troubling trend that suggests the full impact of the mortgage crisis has yet to be absorbed by many of the nation’s insured banking institutions.

According to the FDIC’s latest quarterly profile of banks, released Thursday, loan-loss reserves increased by 18.1 percent to $18.5 billion — the largest quarterly increase in more than 20 years — but the larger increase in noncurrent loans meant that the coverage ratio fell from 93 cents in reserves for every $1.00 of noncurrent loans to 89 cents. That’s the lowest loss reserve level since 1993, the FDIC said.

“This is a worrisome trend,” FDIC chairman Sheila Bair said. “It’s the kind of thing that gives regulators heartburn.

“The banks and thrifts we’re keeping an eye on most are those with high levels of exposure to subprime and nontraditional mortgages, with concentrations of construction loans in overbuilt markets, and institutions that get a large share of their revenues from market-related activities, such as from securities trading.”

Loans that were noncurrent — defined as 90 days or more past due, or in nonaccrual status — increased by $26 billion to $136 billion during the first quarter, the FDIC said. That followed a $27 billion increase in the fourth quarter of 2007.

Almost 90 percent of the increase in noncurrent loans in the first quarter consisted of real estate loans, but noncurrent levels increased in all major loan categories.

For more information, visit http://www.fdic.gov.