Banks Set Aside Record $37 Billion, FDIC Says

Troubled real estate loans forced U.S. banks to boost loan loss provisions to a record $37.1 billion in the first quarter of 2008, compared to $9.2 billion in the year-ago period, the Federal Deposit Insurance said Thursday.

"Based on the data we have now, I would expect them (loan loss provisions) to keep going up for the next few quarters," FDIC Chairman Sheila Bair told reporters at a briefing to release the agency's quarterly industry report.

The FDIC raised the number of problem banks to 90, up from 76 at the end of 2007, the agency said. These are defined as banks with financial, operational or managerial weaknesses that threaten their financial viability.

The agency did not identify these banks, which it said have a combined $26 billion in assets. The number of problem banks has risen for six straight quarters and is likely to continue, Bair said.

"The number of bank failures will go up from last year... because of the credit quality, the asset quality," she said. So far in 2008, three small U.S. banks have failed, the same number as for all of 2007.

"It all depends on housing," Bair said, referring to the decline in U.S. home prices and rising foreclosures.

The FDIC, which insures customer deposits at banks, also revised industrywide fourth-quarter earnings to a total $646 million from $5.8 billion, slumping to a quarterly level not seen since the last quarter of 1990. In the first quarter of 2008, U.S. banks earned $19.3 billion, it said.

The FDIC cut the fourth quarter earnings to reflect accounting adjustments in goodwill, it said.

U.S. bank charge-offs climbed to a 5-year high of $19.6 billion in the first quarter of 2008 from $11.4 billion in the year-ago period, the FDIC said.

"While we may be past the worst of the turmoil in financial markets, we're still in the early stages of the traditional credit crisis you typically see during an economic downturn," Bair said.

The FDIC is encouraging all banks to expand their capital and reserves beyond the regulatory minimums. "It's only prudent to be building up capital at a time like this," she said.

Copyright 2009 Reuters. Click for restrictions.