A new report Tuesday (August 26) shows that US banks suffered through one of their worst quarters in history during the second economic quarter of 2008. According to the Federal Deposit Insurance Corporation (FDIC), there were an incredible 117 banks that it considers to have been in “trouble” during the second quarter. This was up from the 90 that were noted during the first quarter, and signifies the largest number of banks listed by the FDIC since mid-2003.

Even more remarkably, the FDIC says bank profits fell by 86 per cent during the second quarter. The tremendous loss is widely attributed to the more than one year long turmoil in both the housing and credit markets.

The FDIC is the institution that insures the funds maintained by the vast majority of US banks. Perhaps the most alarming number offered by the organization was that a look at the 8,500 banks under FDIC protection, showed earnings of $5 billion during the April-June quarter. This is down from $36.8 billion in earnings that were reported during the same period last year. Not surprisingly, the entity credits much of the problems to the bad mortgage and loans that affected by large institutions.

In fact, none of the numbers offered in the FDIC report are especially surprising. While definitely disappointing, the FDIC information essentially confirms the overall picture in housing and credit that has played out with negative bank earnings reports that have piled one on top of the other in recent months. Many of the leading banks in the country have reported significant losses in recent months, mostly due to bad loan write offs or reserve fund allowances.

Apparently, in spite of the overwhelmingly negative data, most banks should have adequate capital to survive the remainder of the challenge in the credit market. According to FDIC Chairman Sheila Blair, who shared the findings in a press conference Tuesday, 98 per cent of the FDIC insured banks still have enough capital to meet the standards required by the insurer. Her optimism was good to hear for consumers and businesses, considering the anxiety many have felt about the safety of their savings and deposit accounts in recent months.

The financial performance of banks during the second quarter was not quite as bad as that reported during the final quarter of 2007. However, the 2007 final quarter and the current quarter represent the worst financial earnings performance by FDIC banks since 1991. This illustrates just how much longevity the recent housing and credit market issues have had.

Investors on Wall Street were somewhat resilient on Tuesday, considering the bank news and a rise in oil prices. Following a strong drop in Monday equities trade, the prospect of another steep fall Tuesday seemed likely. Instead, buyers and sellers pushed back and forth to a stalemate on the day.

In other economic news, the dollar has started off the new week relatively firm against most major currencies. The greenback has been resilient to virtually any type of downward pressure in recent months. The dollar currently nets 109.30 yen. More impressively, the Euro has dropped below $1.47 and the British Pound is now nearly 22 pips off its high less than one year ago. One British Pound now is worth just over $1.84, after a record high over $2.06 late last year.

Market Recap

The Dow opened the new week of trade Monday by giving back all of its Friday gains, and then some, with a 240 point loss. Tuesday was mixed as traders lacked much directional enthusiasm. Bargain buyers tried to get in at lower prices after the Monday dip, but higher oil and consumer data confused the situation. The Dow picked up 26 points, while the NASDAQ lost 3, and the S&P gained 4. The dollar has started the week relatively firm against most major currencies. It currently sits above 109 yen and has pushed the Euro back below $1.47, and the Pound below $1.85.

Neil Kokemuller
Tuesday, August 26, 2008
11:16 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.