US banks report biggest loss in 25 years

FDIC chairwoman Sheila Bair said, ''The fourth quarter was a tough end to a tough year for the banking industry.'' (Joshua Roberts/Bloomberg News)

WASHINGTON - The nation's banks lost $26.2 billion in the last three months of 2008, the first quarterly deficit in 18 years, as the housing and credit crises escalated.

The Federal Deposit Insurance Corp. said yesterday that US banks and thrifts also more than doubled the amount they set aside to cover potential loan losses, to $69.3 billion in the fourth quarter from $32.1 billion a year earlier.

Rising losses on loans and eroding values of assets "overwhelmed" banks' revenues in the fourth quarter, the FDIC said. More than two-thirds of all banks and thrifts turned a profit in that period, but their earnings were outstripped by large losses at a number of major banks.

Regulators said there were 252 banks in trouble at the end of 2008, up from 171 in the third quarter.

For all of last year, the banking industry earned $16.1 billion, the smallest annual profit since 1990, according to the FDIC.

The fourth-quarter loss was the biggest in the 25 years that the agency has been compiling quarterly results. It compared with a $575 million profit in the fourth quarter of 2007.

FDIC chairwoman Sheila Bair, reaching for a silver lining in the dismal picture, noted that total deposits increased in the quarter by $307.9 billion, or 3.5 percent - the largest rise in 10 years. Deposits in domestic bank offices rose $274.1 billion, or 3.8 percent. That showed confidence in the banking system and deposit insurance, Bair said. But she acknowledged that "the fourth quarter was a tough end to a tough year for the banking industry."

The latest indications of financial distress came as the Obama administration proposed boosting the federal deficit by an additional $250 billion, enough to support as much as $750 billion in increased spending under the government's rescue program for financial institutions.

The government began "stress tests" Wednesday for 19 of the largest banks that will gauge whether each institution has adequate capital to survive a severe downturn. Banks that need new funds will be given six months to raise the money from the private sector or, failing that, from additional capital injections under the bailout program.

The FDIC report "confirms what we already know - the weak economy is continuing to make it difficult for some businesses and individuals to repay their loans," James Chessen, chief economist at the American Bankers Association, said. At the same time, "banks are taking the necessary steps to put losses behind them" and continue to actively lend, he added.

Two-thirds of US banks increased their lending in the fourth quarter, Chessen said.

The Office of Thrift Supervision, meanwhile, reported a loss of $3 billion in the quarter and a record $13 billion annual loss for savings and loans last year.