305 Problem Banks, 150 'Past Point of No Return'

FN: As these banks and more fail, and cash strapped FDIC is going to have to tap that $500 billion line of credit it setup with the Treasury. The question is, can the Treasury raise that kind of money when the time comes? Already serious signs of stress are evident in each bond auction as it becomes increasingly difficult to find enough buyers of US sovereign debt.

The KBW Regional Banking Index (KRX) is a good proxy for these troubled banks because it doesn't include the mega banks like Bank of America (BAC) and Citigroup (C) that tend to be treated especially favorably by the government.

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return: "More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter."