FDIC's Bair rebukes bankers

Profit-minded bankers risk undermining the financial system's modest recovery, FDIC chief Sheila Bair said Wednesday.

The banking industry posted its smallest quarterly profit of 2010, the FDIC said -- even as bankers sharply drew down their loss reserves, drawing a rare rebuke from Bair.

More failures ahead

U.S. banks turned a $14.5 billion profit in the third quarter, the Federal Deposit Insurance Corp. said in its quarterly review of the industry. The FDIC said more than 80% of banks turned a profit in the quarter ended in September, and the industry would have posted its strongest quarter in three years if not for two large one-time losses at big banks.

"The industry continues making progress," Bair said in a press conference in Washington.

But loan balances declined for the eight time in nine quarters, showing banks remain reluctant to lend, creating a formidable headwind to economic growth.

Meanwhile the list of institutions at risk of failure surged for the 16^th straight quarter to 860 (see chart, right). The problem bank list was last that high in 1993, at the tail end of the savings-and-loan crisis.

And Bair warned that bankers may be reducing their loan loss reserves too early. Provisions for loan losses dropped to their lowest level in three years, even as "troubled loans remain near historic high levels," Bair said.

Accordingly, reserves against future losses dropped to 63.9% of noncurrent loans from 65% in the second quarter -- too close for comfort as far as the FDIC chief is concerned.

"Many institutions came into the recent crisis with inadequate reserve levels and they need to exercise restraint in drawing them down now," Bair said. "At this point to the credit cycle it is too early for institutions to draw down reserves without strong evidence of sustainable improving loan performance and reduced loss rates."