Colin Barr

Following the money in banking, economics, and Washington

Problem bank ratio at 23-year high

February 23, 2011: 2:48 PM ET

Fewer banks, more problems.

That's one take on the state of the banking industry, via the latest review issued by the Federal Deposit Insurance Corp.

Climb every mountain, like it or not

The number of banks fell for the 25th straight year in 2010, FDIC data show. The agency's deposit insurance fund now covers 7,657 banks and thrifts. That's down 25% from 1999 levels and 58% below the 1985 peak.

At the same time, the number of banks at risk of failure continues to climb. The FDIC says 884 institutions rate dishonorable mention (anonymously, of course) on its problem list. That number has risen for 17 straight quarters to its highest level since 1992, at the tail end of the savings and loan crisis.

And if anything that measure understates the severity of this crisis, which comes after the biggest financial meltdown since the Great Depression.

The number of FDIC-backed banks judged at risk of failure is 11.5% -- which is to say 1 bank in 9 is in danger of collapse.

That is the highest level since 1987, when 12.5% of banks -- 1 in 8 -- were on the problem list. It is also the third highest level since records started being kept in 1980, according to data provided by FDIC stats whiz Ross Waldorp.

Of course, there are signs the worst of the bank failure wave has passed. U.S. banks posted a profit for the fourth straight quarter and trimmed their loan loss reserves substantially at the end of 2010, in a sign either that bankers have learned nothing from the last crisis or that conditions are getting better. Probably both.

With regulators granting next to no new charters, mergers starting to come together and banks still failing at a considerable clip, it is a good bet that there will be many fewer banks around at this time next year, one way or another.

But are a shrinking banking sector and more powerful megabanks a recipe for a robust economic recovery? That is another question altogether -- and one that regulators seem to have no interest in debating at the moment.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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