by Bob Kemper 

In contrast to the hopeful signs of recovery in financial markets and the economy overall, the banking industry continues to struggle in the worst economic crisis since the Great Depression. Forty-five banks failed and another 111 were added to a list of "problem banks" after the industry racked up $3.7 billion in loses in the second quarter, the Federal Deposit Insurance Corporation said in its Aug. 27, 2009, report.

Bank losses mounted as home builders, commercial real estate developers and other small to midsize businesses continued to default on loans, according to the FDIC, which insures the nation's bank deposits. Banks' poor second-quarter performance brings the total of failed banks seized by the federal government to 81 this year and the number of "problem banks" that don't meet standards for asset quality, liquidity and earnings to 416, the FDIC reported.

The number of institutions in dire straits remains a small percentage of the nation's 8,195 FDIC-insured banks, but the trend shows that the crisis, which claimed some of the nation's largest banks early on, is spreading among smaller institutions that profit on loans to consumers and businesses rather than the sometimes-risky investments and financial derivatives that sank larger institutions.  The industry's massive second-quarter losses have reduced the FDIC's insurance fund by 20 percent, to $10.4 billion, its lowest level since the savings-and-loan crisis of 1993.

FDIC officials say there is still enough money to insure deposits up to $250,000. But, facing the likelihood of additional bank failures in the second half of the year, those officials are weighing whether to charge banks higher assessments in the third quarter to help cover the cost. The FDIC also is selling off assets from banks it seized to raise money and avoid the need to tap its $100 billion line of credit from the Treasury Department.

FDIC Chairwoman Sheila C. Bair said banks are likely to take much longer than the rest of the economy to recover from the recession. "These credit problems will at least outlast the recession by a couple of quarters," Bair said. "Cleaning up balance sheets is a painful process that does take time, but it is absolutely necessary to the industry's sustained profitability."