The GDP numbers may show that the economy is out of recession and the worst of the crisis is behind us, but most of the banks in the country are not out of trouble yet.
According to the latest report on the health of the banking system from the Federal Deposit Insurance Corporation, or FDIC, more than half of the banks in the country are not being able to give out any new loans. The problem is that bad loans on the books of these banks are constantly rising. With their interest income drying up, they don’t have any money to lend to new customers and are just waiting anxiously for things to improve.
The number of banks in trouble has reached the highest level in more than 15 years, with about 700 banks now falling in the category of ‘problem’ banks. The number rose by more than a quarter in the last year, and continues to edge upwards.
The issue is not reported as often as it should be, because all the limelight in the media is hogged by large banks. But if something is not done soon enough to resolve the problem, it could lead to major problems for the economy.
These banks are the engines for local economies, without which things could come to a grinding halt. A large number of small and mid sized businesses depend on these banks for funding their operations. If the local businesses are not able to find loans, it would have a major impact on the industrial output. The situation has become worse because the large banks have also become risk averse and have made their lending norms much stricter.
Most of the bad loans for troubled banks are arising from the construction industry and the commercial real estate sector. Neither of these sectors has shown any signs of improvement yet. The commercial real estate prices are not likely to recover anytime soon, while the construction sector is seeing activity only in government funded projects.
Because of all these bad loans, and with so many banks going bust, the FDIC’s fund is facing a deficit of more than $20 billion. The agency, which insures deposits up to a limit of $250,000 at almost 9,000 institutions, would soon need more funding from the government. There have already been suggestions that part of the bailout money paid back by large banks should go to the FDIC.
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