One in five banks on failure watch list

One in five state-regulated Minnesota banks and credit unions are on watch lists for being failure risks, a top commerce official said Tuesday.

Deputy state Commerce Commissioner Kevin Murphy told legislators that 71 banks are on a Commerce Department watch list, or about 22 percent of those under state jurisdiction. Thirty were rated unsatisfactory or poor during examinations by regulator. An additional 21 credit unions appear on a separate state watch list, which amounts to 22 percent of those regulated by the state.

Four Minnesota banks have already failed in 2009, more than in any calendar year since 1990.

"I would venture to guess it might be a little bumpy for a while more," Murphy warned the Senate Commerce and Consumer Protection Committee.

Murphy said both watch lists have grown since last year - 50 institutions were on the bank watch list in 2008. He said some banks would work their way off it but that others would remain in a precarious position until they can raise more capital.

"It's not realistic to expect absolutely no failures but we want to have minimal failures," Murphy said, adding, "The failures get huge coverage in the newspapers and the successes do not."

The Senate committee got the update on bank stability just days after regulators closed the fourth Minnesota bank since May. The Federal Deposit Insurance Corp. shut down Jennings State Bank in Spring Grove, Minn., on Friday.

Nationwide, 98 banks have failed this year and 416 are deemed a problem, said James LaPierre, the FDIC regional director. Both figures are considerably higher than in recent years.

The FDIC has said this year's failures nationwide have cost the fund that insures bank deposits about $25 billion.

Experts have attributed the closure trend to losses on commercial real estate and other shaky loans the banks have been struggling to recoup during the recession. Collapsed businesses and out-of-work people have defaulted on loans and investment income for banks has also dropped.

Joe Witt, president of the Minnesota Bankers Association, said there is nothing unique about the situation in Minnesota and that some banks in the state are outperforming their peers elsewhere. Witt said 333 Minnesota banks have made money in the second fiscal quarter of 2009.

"We're doing OK, but not great," Witt said. "We're doing a little better than the national numbers, but we're not blowing the doors off either."

Witt said good loans can go bad because of poor economic conditions. "Just because a loan went bad doesn't make it a risky loan," he said.

The last time Minnesota had more than one bank shut down in a year was in 1990, when four closed. The largest failure in the state this year was Mainstreet Bank in Forest Lake, which had $450 million in assets.

In the last quarter century, the most Minnesota banks to fail in one year was in 1988 when 13 went under.

(Copyright 2009 by The Associated Press. All Rights Reserved.)

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