Bank Failures Reach Highest Level Since 1992

With two additional bank closures Friday, a total of 143 US banks have now failed this year, exceeding the 140 banks that failed in 2009. There will be more to come since there are still two months to go in this calendar year.

Since the creation of the FDIC in 1933, there have been only 12 years in which 100 banks have failed in a single year. And it has now happened in back-to-back years.

It's a good bet that that there are still many more failures to come; by the end of the second quarter, the number of lenders on the FDIC's "problem" banks list had climbed to 829, the highest since 1992. It was also nearly double the number that were on the list a year earlier.

What this means is that more than 10 percent of US banks are now on the problem list. Bank failures over the past two years have pushed the number of FDIC institutions to below 8,000 for the first time in the agency's 76-year history.

Two decades ago, the FDIC insured more than 16,000 institutions nationwide. As a result of the massive number of failures since that time, banks have not only become fewer, but also bigger as a result of consolidation.

The 143 bank failures this year amount to the highest total since 1992, at the height of the savings and loan crisis.

For comparison's sake, twenty-five banks failed in 2008 and only three succumbed in 2007.

The growing number of bank failures have sapped billions of dollars out of the FDIC's deposit insurance fund. It fell into the red last year, and its deficit stood at $15.2 billion as of June 30.

The deposit insurance fund has lost about $21 billion so far this year, compared with $36 billion in 2009.

Due to the pace of home foreclosures and commercial property losses, bank troubles will continue into the foreseeable future.

The vacancy rate at malls and in office buildings has spiked across the country. The number of delinquencies and defaults are straining the capacity of many community and regional lenders to survive.

According to CoreLogic, more than 11 million homeowners across the country are underwater. It's estimated that number could double in the next year, which means nearly half of all American mortgage holders will owe more on their homes than those homes are currently worth.

That would spell disaster for the banking system. And the FDIC would be quite challenged to cover all the losses.

Many US banks are severely under-capitalized, hence the reason they are failing.

The government changed accounting rules for banks during the financial crisis so that they no longer have to mark foreclosed properties to market values. Banks have been allowed to "extend and pretend," as they await for the housing market to recover. That could take many years.

If the banks had to mark these "assets" — which at this point could be more accurately described as liabilities — to current market values, even more institutions would be revealed as bankrupt.

As the commercial real estate market continues to falter and more loans go bad, the losses at banks will become overwhelming.

And, as always, US taxpayers will end up footing the bill for all these failures.