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October 26, 2009

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Closure of 106 banks in US is the highest in nearly 20 years

THE number of United States banks that have failed so far this year topped 100 last Friday - hitting 106 by the end of the day - the most in nearly two decades. But the trouble in the banking system from bad loans and the recession goes even deeper.

Dozens, perhaps hundreds, of other banks remain open even though they are as weak as many that have been shuttered. Regulators are seizing banks slowly and selectively - partly to avoid inciting panic and partly because buyers for bad banks are hard to find.

Going slow buys time. An economic recovery could save some banks that would otherwise go under. But if the recovery is slow and smaller banks' finances get even worse, it could wind up costing even more.

This year's 106 bank failures are the most in any year since 181 collapsed in 1992 at the end of the savings-and-loan crisis. Last Friday, regulators took over three small Florida banks - Partners Bank and Hillcrest Bank Florida, both of Naples, and Flagship National Bank in Bradenton - along with four elsewhere: American United Bank of Lawrenceville, Georgia, Bank of Elmwood in Racine, Wisconsin, Riverview Community Bank in Otsego, Minnesota, and First Dupage Bank in Westmont, Illinois.

When a bank fails, the Federal Deposit Insurance Corp swoops in, usually on a Friday afternoon. It tries to sell off the bank's assets to buyers and cover its liabilities, primarily customer deposits. It taps the insurance fund to cover the rest.

Bank failures have cost the FDIC's fund that insures deposits an estimated US$25 billion this year and are expected to cost US$100 billion through 2013. To replenish the fund, the agency wants banks to pay in advance US$45 billion in premiums that would have been due over the next three years.

The FDIC won't say how deep a hole its deposit insurance fund is in. It can tap a credit line from the Treasury of up to a half-trillion dollars to cover the gap.

The list of banks in trouble is getting longer. At the end of June, the FDIC had flagged 416 as being at risk of failure, up from 305 at the end of March and 252 at the beginning of the year.


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