UPDATE: FDIC is raising its fees and will charge banks an emergency fee. For more, click here.
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 Thursday that U.S. 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' revenue 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.
FDIC Chairman Sheila Bair said the agency on Friday will raise the insurance premiums paid by U.S. banks and thrifts, effective in the second quarter, to rebuild a fund depleted by 25 bank failures last year. That will follow a plan to replenish the deposit insurance fund put in place in October that increased average premiums to 13.5 cents for every $100 of banks' deposits from 6.3 cents.
The FDIC believes U.S. bank failures will cost the deposit insurance fund more than $40 billion over the next four years.
Fourteen federally-insured institutions already have failed this year, extending a wave of collapses that began in 2008. Last year's tally of 25 banks shut down by regulators was more than in the previous five years combined and up from only three bank failures in 2007.
The failures sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level for the fund since 1993, during the savings and loan crisis. That compares with $52.4 billion a year earlier.
The 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, amid the ravages of rising unemployment and falling home prices that have sent loan defaults soaring.
The fourth-quarter loss of $26.2 billion 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.
Bair, reaching for a silver lining in the dismal picture, noted that total bank deposits increased in the October-December period 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 this year, enough to support as much as $750 billion in increased spending under the government's rescue program for banks and other financial institutions. That would more than double the $700 billion bank bailout passed by Congress last October that has provided aid to Citigroup Inc., Bank of America Corp. and hundreds more financial institutions of all sizes.
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 in a statement. 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 U.S. banks increased their lending in the fourth quarter, Chessen said.
The Office of Thrift Supervision, meanwhile, announced a loss of $3 billion in the fourth quarter and a record $13 billion annual loss for savings and loans last year.
The agency, part of the Treasury Department, also said it is launching a new unit to monitor thrifts with more than $10 billion in assets. The new "large bank unit" will be working onsite at about 25 savings institutions.
The OTS also will create new standards for reviewing enforcement actions on thrifts that do not meet minimum standards.
Thrifts are important to consumer lending because they must have at least 65 percent of their lending in mortgages and other consumer loans. That also has made them especially vulnerable to the housing downturn: troubled assets now account for more than 2.5 percent of total thrift assets, up from nearly 1.7 percent a year ago.
Two of the biggest bank failures in the nation's history occurred last year and involved thrifts, and some lawmakers have raised concerns about the OTS' oversight of the industry.
Pasadena, Calif.-based IndyMac Bank collapsed in July and cost the federal deposit insurance fund $10.7 billion and Seattle-based Washington Mutual Inc. was the largest U.S. bank failure ever. WaMu fell in September, with around $307 billion in assets, and was acquired by JPMorgan Chase & Co. for $1.9 billion in a deal brokered by the FDIC.
The Treasury's inspector general, in a report released Thursday, found that the thrift agency missed warning signs about IndyMac and its irresponsible extending of mortgage credit, and should have acted against the bank much earlier than it did. IndyMac's "high-risk business strategy warranted more careful and much earlier attention" from the regulators, said the report by Inspector General Eric Thorson.
OTS said in its response to the report that it agreed with the findings and outlined actions it is taking to address the regulatory shortcomings _ notably establishment of the new unit for large thrifts.
U.S. banks and thrifts in the third quarter suffered a 94 percent drop in profits to $1.7 billion, from $27 billion in the same period in 2007. The institutions wrote off $27.9 billion in loans as uncollectible during the July-September quarter.
AP Business Writer Daniel Wagner contributed to this report.