The federal government's seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry, which is in a tightening bind following a long run of prosperity.
Banks and thrifts are struggling against a rising tide of bad loans, and it is becoming increasingly clear that some lenders won't be able to escape. While fewer banks are expected to fail than the 834 that went under from 1990 to 1992, it will likely take several years for battered financial institutions to work through their bad loans and replenish their depleted capital.
Those gloomy scenarios could be avoided, however, if the U.S. economy and housing market rebound soon, which would help consumers and businesses that have fallen behind on their loan payments.
Even signs that the worst is over could bolster the confidence of healthier banks enough to spark a flurry of takeovers that would rid the industry of some of its weakest performers.
But at least for now, as the turmoil worsens, signs are emerging that consumers, who generally thought little about the safety of their deposits when times were good, are having some second thoughts. More likely than the kind of exodus of depositors that quickly sank IndyMac is what some bankers are describing as a slow-motion "walk on the bank," which could cripple financial institutions already weakened by credit problems.
The Federal Deposit Insurance Corp. insures deposits of up to $100,000 per depositor per bank, or $250,000 for most retirement accounts, including any accrued interest. It guarantees that depositors with sums below those ceilings will get all their money back. But a surprising proportion of deposits exceeds those limits.
Indeed, the percentage of uninsured deposits has doubled since 1992, climbing to about 37 percent of the nation's $7.07 trillion in deposits at the end of the first quarter, according to an analysis of data reported to the FDIC. The figures are based on data submitted by commercial banks and savings institution.
It isn't clear what percentage of those uninsured deposits belongs to individual consumers. The figures also include large corporate and institutional deposits, such as payroll accounts.
Amid the steady drumbeat of bad news about banks, some depositors are already shifting money to institutions they consider to be better equipped to weather the storm sweeping the industry.
Robert New, chief executive of First National Bank, said his Hermitage, Pa., bank, a unit of publicly traded F.N.B. Corp., is winning new customers - including individuals and small businesses - who are pulling deposits out of larger rivals whose well-publicized problems are making depositors nervous.
"Depositors are being more aware of the health of their banks," Mr. New said. Customers are saying, "I'm nervous, I'm moving my deposits," he added.
The fast-moving decline of IndyMac Bancorp Inc., parent of IndyMac Bank and a mortgage lender that was one of the nation's largest savings and loans, illustrates that the problems in the U.S. banking system are much wider and deeper than a few months ago.
Although roughly a year has passed since credit conditions began to tighten, wreaking havoc on capital markets, many traditional banks are just now starting to feel the effects of a rising number of borrowers who can't pay back loans, ranging from mortgages to auto loans to small-business loans.
Adding to the problem is that banks that need to shore up their balance sheets are beginning to have trouble attracting capital from investors. Moreover, there is a lack of buyers who are financially able or willing to snap up wounded banks.
The shaky state of the industry will be on vivid display this week when banks start to report financial results for the second quarter. Those results are largely expected to weaken from the first quarter, when bank profits tumbled 46 percent from a year earlier to $19.3 billion, according to the FDIC. Slightly more than half of the nation's insured institutions reported profit declines in the first quarter.
"This is a very serious banking crisis. There's just no question about that," said Donald G. Ogilvie, a longtime president of the American Bankers Association and now a senior adviser at Deloitte LLP.
For much of the past decade, borrowers and lenders have been lulled into a sense of security about the safety of the banking system. As real-estate values soared, banks doled out loans that fed the explosion in residential construction, mortgages and home-equity borrowings. Loan defaults hovered at historic lows as home buyers and builders flipped properties and sold them at huge profits.
At the same time, banks fueled the demand for loans by competing fiercely against one another for customer deposits. They wooed customers with new high-yield savings accounts and certificates of deposit, and special Internet-only promotions. Banks now also routinely encourage customers to pay bills online - a practice that makes it difficult for customers to sever their banking relationships. And customers who keep multiple accounts at the same bank, such as traditional savings deposits, credit-card accounts or CDs, often get the best rates on loans.
But all too often consumers accumulate money in a single bank to earn better returns or end up exceeding the limits covered by federal insurance simply by not paying attention to a growing balance.
Regional and specialized institutions that have been battered by soured loans have been among the most aggressive in luring new money. Last week, IndyMac was offering 4.35 percent interest on a one-year online CD. And although the bank's primary business is in California, depositors from distant locations have taken advantage of these types of attractive offers. One big depositor called in from South America to inquire about the security of his money, said an IndyMac bank manager.
"It's a scary place to put your money with some of these institutions that are offering high rates to attract deposits. There will be some people who will learn a lesson," said James Abbott, a banking analyst at Friedman, Billings, Ramsey & Co.
When a bank fails, there is no guarantee uninsured deposits will be paid back. That holds true for some IndyMac depositors. Federal regulators initially said about 10,000 people with a total of nearly $1 billion of deposits aren't automatically protected by the deposit-insurance fund. That figure represents about 5 percent of IndyMac's total deposit base.
Over the weekend, FDIC officials identified those roughly 10,000 depositors and began making appointments with them to review their accounts and to see how they might be able to recoup more of their money, said FDIC spokesman David Barr.
Margaret Gentle, a Pasadena, Calif., homemaker, had been planning to put more money into her IndyMac money-market account early last week, but she decided against the move because of concerns about the bank. She said she exclaimed "Wow!" when she picked up her local newspaper Saturday to see a headline about the thrift's seizure. "We have under $100,000 there, so we should be OK. I'll be there Monday to get my money out," she added.
Some industry officials say large depositors are increasingly likely to yank their money out of struggling institutions. "Consumers believe that there is an implicit guarantee from the government that the large banks aren't going to fail. When they look at the smaller banks, they have less comfort that is going to be the case," said Aaron Fine, a partner in the retail-banking practice at consulting firm Oliver Wyman in New York.
As a result, some customers are moving their money to larger banks, he said, noting that the first-quarter deposit base increased by 6 percent from the fourth quarter of 2007 at banks with more than $10 billion in deposits. Deposits at small banks grew by just 2 percent.
Bankers say that local businesses and municipalities, which often stash hundreds of thousands of dollars at a single bank, are likely to shift some or all of their funds out of institutions that are perceived as especially risky. Small and midsize banks are most vulnerable to losing a few big depositors, but larger banks that are struggling can also feel the pinch.
In the meantime, the FDIC will bear the bulk of the financial burden of IndyMac's failure, predicting that its collapse will cost the deposit-insurance fund between $4 billion and $8 billion, possibly making it the costliest bank failure ever. If an expected surge in bank failures materializes, other financial institutions, which pay assessments to the FDIC to capitalize the fund, may be forced to provide the agency with more money.
Still, FDIC Chairman Sheila Bair says the agency is equipped to manage the deteriorating environment. "There will be increased failures, but it still will be within the (realm) of what we can handle, will handle," she said. "No insured depositor has ever lost a penny of insured deposits."
Tom McGinty, Shelly Banjo, Damian Paletta and Lingling Wei contributed to this article.