March 05, 2013

The number of undercapitalized banks has fallen to its lowest level since late 2009, new research from business intelligence firm SNL Financial shows. However, that news is necessarily good as there are more banks labeled “problem institutions” by the FDIC than there were in 2008 or 2009, according to the research. Although these two trends would seem to contradict each other, SNL explains in its report that the drop in undercapitalized institutions has been caused by the failure of many banks previously determined to be undercapitalized.

Few undercapitalized institutions have made it out of trouble through raising new capital, the report said.. In the second quarter of last year, for instance, 15 undercapitalized banks failed, while only three escaped their predicament through de-levering, the research says. That trend continued in the third quarter when three more undercapitalized banks managed to recapitalize while 12 of them failed. Overall the number of undercapitalized institutions fell from 67 to 41 in 2012. Few of the banks that have dug out of the undercapitalized list did so through traditional capital increases, the report noted, with many of them being revived through sales at low prices or sales made under section 363 of the bankruptcy code.

Bank failures have slowed down in the last couple of years though. In 2010 157 banks shuttered, and 92 failed in 2011. Bank closures further declined to 51 in 2012, according to the report.

[See Related: Bank Failures Down in 2013]

While bank failures have lowered the number of undercapitalized banks, the number of problem institutions has stayed high compared to the level of 2008 and 2009. The problem list shrank from 694 institutions to 651 in the fourth quarter of 2012, a considerable drop from 813 at the end of 2011, the report said. But the number of banks on the problem list is not much lower than at the end of 2009 when 702 were on the list, and is still much higher than at the end of 2008 when only 252 banks were considered problem institutions.

Jonathan Camhi is a graduate of the City University of New York's Graduate School of Journalism, where he focused on international reporting and interned at the Hindustan Times in Delhi, ...