There is good news and bad news regarding U.S. banks.  The good news is that the drama of a major bank failure is probably over.  The stress tests and the ensuing capital markets road trip by most of the 19 major banks with over $100 billion of assets under management indicates that jump-to-default risk has diminished.  The combination of TARP recapitalization, help through providing FDIC guarantees for bank issuance, and other measures have brought a degree of stabilization to the major banks.

The bad news is that bank problems are not over and the brunt of the next wave is going to result in more moderate-sized bank failures.  The most recent FDIC report is instructive:

- The number of “problem banks” in the United States has risen by 21% in Q1. This is the highest level since 1994 and more is to           come;

- The number of banks on the “problem list” is climbed to 305. This accounts for banks that are in trouble, some of which will either         be taken over by the FDIC, sold to stronger banks or nursed back to health;

- The collective net income of the 8,200 banks that the FDIC insures fell by 60.8% year-on-year to $7.6 billion;

- One in five U.S. banks did not make a profit in Q1;

- The number of loans at least 90 days past due is at the highest level since 1991;

- The FDIC’s insurance fund declined further, from $17.3 billion to $13 billion in Q1.  At the beginning of 2007 it was $50 billion.  This has led the FDIC to announce that it will charge banks an additional insurance fee to raise $5.6 billion to replenish its coffers.

Surveying the data, FDIC Chairman Shelia Bair stated: “The first quarter results are telling us that the banking industry still faces tremendous challenges and that, going forward, asset quality remains a major concern. Bank failures continued to mount and they will continue to do so.”