Troubled-bank list shrinks

Fewer banks are staring into the abyss, according to one number cruncher.

Highline Financial's quarterly banking watch list shrank a bit in the third quarter, the New York-based company said Friday. Highline said 744 banks this month were on its watch list, which tracks institutions scoring weakly in terms of capital, asset strength, earnings power or liquidity. That's down from 796 in June.

Some trends aren't as upbeat

The number of institutions deemed in danger of failing also fell, to 259 banks with $125 billion in assets. In June, Highline said 271 banks with $130 billion in assets were on its so-called extreme list, which comprises banks scoring zero on the financial strength test and presumably in grave danger.

The firm said that of the institutions that fell off the extreme list in the latest quarter, 34 failed, four were acquired and 23 boosted their rating.

The decline in its problem and watch lists signals a tiny bit of good news for an industry that has been under intense pressure for several years and is only now returning to profitability. Highline said 92% of the 125 banks that have failed this year had scored its lowest rating before their collapse, so a smaller list may mean a few more banks will manage to hang on.

Even so, official measures continue to signal more pain ahead. The Federal Deposit Insurance Corp.'s problem list (see chart above) hit 829 last quarter, its highest level since the tail end of the savings-and-loan crisis two decades ago.