Banks Lost $744 Million in 3rd Quarter--FDIC

The nation’s commercial banks lost $744 million in the third quarter this year, the first loss in more than two years, the government said today.

The loss was attributed to action by several large banks to set aside new reserves for expected losses on loans to Third World nations, as well as to rising real estate loan problems in the Northeast and Arizona, the Federal Deposit Insurance Corp. said.

FDIC Chairman L. William Seidman also said the insurance fund protecting commercial bank deposits probably will record the second loss in its history this year. The fund declined about $4 billion in 1988 and will shrink an additional $250 million to $500 million this year, he said.

Bank failures, at 192 so far this year, probably will approach but not exceed last year’s record of 211, he said. He predicted that the failure rate will decline next year.

Seidman said banks should approach commercial and development real estate lending more cautiously. Although he expects bank profits overall to bounce back in the final three months of 1989, he said, he expects the number of sour real estate loans to continue to rise.

“I don’t want to Scrooge up Christmas . . . but I’m afraid the fourth quarter will show a continuation of the (real estate) trends we see here,” he said.

The loss in the July-September period compares with profits of $7 billion in the second quarter and $7.3 billion in the first quarter. Last year banks earned a record profit of $25.2 billion.

Some of the nation’s largest banks took large writedowns in the third quarter attributed to losses on loans to developing countries. J. P. Morgan & Co. increased its loss reserves by $2 billion; Chase Manhattan Corp. by $1.3 billion and Manufacturers Hanover Trust Corp. by $950 million.

Analysts attributed the writedowns to banks’ recognition that Treasury Secretary Nicholas F. Brady’s debt strategy will require them to accept more losses.

Brady’s plan, launched in March, emphasizes debt reduction as well as new lending to developing countries. However, critics of the plan worry that banks will be reluctant to make new loans after recognizing big losses.

The banking industry is also taking losses on commercial real estate lending, most heavily in the Northeast, Arizona and Florida. In August, Moody’s Investor Service warned that large banks’ involvement in real estate lending makes them vulnerable to rising interest rates or a recession.

Delinquent real estate loans constitute almost half of all sour loans nationally, Seiedman said. In the Northeast, the percentage of delinquent real estate loans has doubled in the past year, he said.