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Bank loan losses surged during the third quarter but the reserves set aside for future problems didn't keep up, the Federal Deposit Insurance Corp. said on Tuesday (11/25/2008).
This is the tenth consecutive quarter that the industry's so-called coverage ratio has slipped and it now languishes at its lowest level since the first quarter of 1993, the FDIC warned.
Banks have been hammered this year by a rapid increase in delinquencies and defaults, mainly on mortgages and other real estate loans. They've raised new capital and increased reserves, but haven't been able to keep up. That suggests banks may have to raise even more capital in coming months.
Net charge-offs totaled $27.9 billion in the quarter, up 156% from a year earlier, according to the FDIC's Quarterly Banking Profile. The net charge-off rate in the third quarter was 1.42%, up from 0.57% in the third quarter of 2007.
The FDIC said this is the highest quarterly net charge-off rate for the industry since 1991. The failure of Washington Mutual on September 25th, 2008 meant that a significant amount of charge-off activity wasn't reflected in the latest quarter, it noted WAMU was acquired by Chase..
Loan-loss reserves didn't keep pace with the growth in non-current loans, and the "coverage ratio" of reserves to non-current loans fell from 89 cents in reserves for every $1 of non-current loans to 85 cents, the FDIC said.
"This is the tenth consecutive quarter that the industry's coverage ratio has fallen; it is now at its lowest level since the first quarter of 1993," the FDIC warned.
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