The fund used to safeguard U.S. bank deposits dropped to a negative balance of $8.2 billion in the third quarter, the first shortfall since 1992, the Federal Deposit Insurance Corp said on Tuesday.

Although the FDIC still has $23.3 billion in cash resources to handle bank failures, its fund balance dipped to a negative balance due to an additional $21.7 billion the FDIC set aside in the quarter for future bank failures.

At the end of the second quarter, the FDIC's insurance fund had stood at $10.4 billion.

The number of banks on the FDIC's problem list rose 33 percent during the third quarter to 552, the highest level since 1993.

The FDIC will soon get an infusion of $45 billion through a plan to have the banking industry prepay three years of assessments.

While those additional funds will boost the cash on hand, accounting rules will stop the FDIC from including all the money immediately in the fund balance.

The depleted insurance fund and the sharp rise in troubled institutions reflects the continued weight of bad loans on banks' balance sheets.

Today's report shows that, while bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance, FDIC Chairman Sheila Bair told reporters in a briefing.

The industry as a whole managed to post a profit for the quarter of $2.8 billion due to growth in operating revenues and a rebound in securities values after a $4.3 billion loss last quarter.

But she said the earnings improvement was counterbalanced by the largest decline in loan balances on record, indicating that banks are still being tight-fisted with credit.

We need to see banks making more loans to their business customers, Bair said.

Loan balances dropped by 2.8 percent or $210.4 billion -- the largest percentage drop since 1984. The tight credit comes as the Obama administration is launching programs to encourage community banks to increase lending to small businesses.


High loan loss provisions continued to be a drag on bank earnings but banks set aside less money in the third quarter, the FDIC said. Industrywide, banks set aside $62.5 billion to cover deteriorating loans, a 7.1 percent decrease from the prior quarter.

The credit adversity we have been discussing for some time remains with us, and we expect that it will be at least a couple more quarters before we see a meaningful improvement in that trend, Bair said.

The third-quarter data revealed that loans are continuing to deteriorate at a rapid pace. The percentage of loans that were 90 days or more past due rose to 4.94 percent of total loans, the highest level in the 26 years that banks have reported the data.

Bair said she was optimistic that if the banking industry addresses its problems head-on, it will see signs of improvement in earnings and lending in 2010.

So far this year, 124 U.S. banks have failed, the highest annual level since 1992.

FDIC officials said on Tuesday they are standing by their projection that the cost of bank failures will total $100 billion from 2009 through 2013.

The FDIC posted its quarterly report at:

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)