Saying that the current credit crunch is nowhere near done, Federal Deposit Insurance Corp. chairman Sheila Bair urged banks to raise loss reserves and raise capital. In remarks delivered Friday at a Florida Bankers Association event in Sarasota, Bair said banking results for the second quarter were “dismal,” and like to get worse going forward before they get better. “Something that you’ve all heard me say, but that bears repeating: it’s absolutely critical that you get your balance sheets in order,” she said in her remarks. “You simply must accept that the credit downturn is far from over. It’s a tough slog but there’s no easy way out.” Read her full speech. The FDIC said last week that industry earnings were 87 percent lower than a year ago; except for the fourth quarter of last year, it was the worst quarter for bank earnings since 1991. The FDIC’s “problem list” grew to 117 institutions from 90 at the end of the first quarter, although the FDIC does not publicize its list of problem banks. That is the largest number on the list since the middle of 2003. Total assets of problem institutions also increased from $26 billion to $78 billion, with $32 billion coming from IndyMac Bank, which failed in July. While Bair said that all loans were becoming troublesome for banks, she particularly singled out residential mortgages as a key factor for banks. “Ten banks have failed so far this year, and more will fail,” she warned. HW’s sources close to the FDIC have said the agency’s internal estimate for bank failures over the next few years is near 800, although FDIC officials have provided a much lower number in public estimates. Insists FDIC funding adequate Responding to recent media reports suggesting that the FDIC may find its deposit insurance fund depleted by an expected spate of coming bank failures, Bair said she was “confident” the FDIC maintained adequate funding to manage through the current crisis. “The fund has all the resources and the tools we need to meet our commitment to insured depositors,” she said. Recent bank failures, particularly the failure of IndyMac Bank in Pasadena, Calif. earlier this year, have pushed the insurance fund’s reserve ratio below the 1.15 percent statutory minimum, something Bair said FDIC officials expected would happen. She emphasized that the FDIC has a line of credit with the U.S. Treasury, if needed, and said the agency would look to hike insurance premiums going forward — with the majority of the premium increases going towards more at-risk banks. Which is sort of the like the conundrum of subprime lending, if you think about; charge those least able to afford their mortgage more money to get it. One source said that the FDIC is privately looking to root out what they called “bad actors,” and that stronger banks that steered clear of risk have suggested they not pay more to fund the failure of those banks unwilling to “more prudently manage their risk profile.” “Officials know the higher deposit insurance premiums will squeeze banks on the brink,” said the source, a senior banking executive that asked not to be named, “but more than a few inside the FDIC have taken the stance that if a bank is set to fail anyway, it should contribute into the fund to essentially help pay for its own failure.” The FDIC currently charges most banks between 5 and 7 cents for every $100 of domestic deposits; some analysts have estimated the premiums could rise as high as 15 basis points.

More: