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US credit problems far from over

Troubled loans keep rising and US banks will need to shore up their reserves to cover potential losses for the next several quarters, Federal Deposit Insurance Corp Chairman Sheila Bair said.

“You simply must accept that the credit downturn is far from over,” Bair said in prepared remarks to a banking group in Florida, a state where the US housing market has taken a dramatic downturn.

She urged banks, “especially here in Florida,” to strengthen their reserves. “It's a tough slog but there's no easy way out,” Bair told the Florida Bankers Association.

Banks have been piling up reserves to cope with credit losses from mortgage defaults and troubled commercial real estate lending activities - raising capital and slashing dividends to retain earnings, which have plummeted in the last several quarters.

Ten FDIC-insured banks have failed so far this year, dominated by the insolvency of California mortgage lender IndyMac Bancorp Inc.

Bair expects more failures but said the FDIC's $45 billion insurance fund, that covers up to $100,000 per deposit and up to $250,000 per retirement account, was strong enough to cope.

IndyMac's failure is expected to cost the FDIC about $8.9 billion.

“We're confident that our industry-funded reserves will be more than adequate to cover any losses caused by more bank failures,” Bair said.

The FDIC has several options to support the fund, including raising premiums on banks and even borrowing government funds.

The FDIC can tap into a $30 billion long-term line of credit with the US Treasury Department and up to $40 billion of short-term credit.

The need to draw on Treasury's Federal Financing Bank will depend primarily on the pace of bank failures and how fast failed bank assets can be sold, Bair said.

“But given the stress analyses (including high-loss scenarios) that we've been doing for over a year, we're confident that our industry funded resources available to the insurance fund are more than enough to cover projected losses,” she said. (Reuters)