When Does It Become A "Problem Bank?"

If you look at the most recent FDIC statistics on problem banks, you would see that there were 829 problem banks at the end of the last quarter. This is an increase of 127 banks in half a year even as the number of firms continues to fall from bank closures and mergers and acquisitions. The FDIC wont disclose who the problem banks are. This is in order to avoid making the bank's financial position even worse and exacerbating their chances of failure. One proxy is to look at the number of banks facing regulatory action, but not all actions are created equally and how the FDIC regards actions by other agencies is not clear. No doubt, you wouldn't want to hear that your bank had an action taken against it. But a small fine is a very different thing then a cease and desist order. Close scrutiny of the actions helps, although that is a lot to look through.

Even as 10% of banks have problems according to the FDIC, only about 2% are believed to close. So, 80% of these banks likely wont have issues so severe as to lead to a failure. Does this mean we have a large number of banks out there 10-20% likely to fail? Or are we looking at a smaller percentage of very risky banks and then a larger handful of "problem" banks that require attention but may be more in the 2-10% range. Certainly, a 2-10% chance in such a sensitive sector still requires scrutiny. But not the same level of fear of impending doom.

The Bank Blog decided to examine this issue. Based on the present model we break the number of banks down into 4 classes based on their risks of failure:

1. Struggling (greater than 50%) - 75 banks
2. Problems (between 10 and 50%) - 204 banks
3. Issues (between 2 and 10%) - 431 banks
4. Stable (less than 2%) - 6998 banks

Naturally, this list does not contain OTS regulated banks but the 730 banks in the higher 3 rankings should roughly approximate the number of "problem banks" in existence that issue call reports. Clearly, the differences in those banks is great.