FDIC Says Problem Banks Shrink as Card Risks Grow

Data from the Federal Deposit Insurance Corporation’s (FDIC) latest report on the state of the banking industry is signaling both optimism and caution. While the number of “problem banks” on its watchlist has declined for the third straight quarter, the regulator also highlighted rising credit card charge-offs,  a risk area that could test consumer resilience.

How FDIC Defines a Problem Bank

As per the information contained in the Quarterly Banking Profile for the June period, the FDIC considers a bank “problematic” when it is assigned a CAMELS composite rating of 4 or 5, signaling significant financial, operational or management weaknesses that threaten continued viability. 

As of the second quarter of 2025, the number of problem banks fell to 59 institutions, down from 63 in the first quarter and marking the lowest level since 2022. These banks collectively represented just 1.3% of all FDIC-insured institutions, underscoring that troubled banks remain a small fraction of the system. 

The pool’s shrinking a bit, as the FDIC noted that the total number of FDIC-insured institutions declined by 41 during the second quarter to 4,421. “During the quarter, two banks opened, one bank failed, five banks were sold to non-FDIC-insured institutions, and 37 institutions merged or consolidated during the quarter,” the FDIC wrote.

As for risks, and guarding against that risk, banks continued to build their buffers against potential credit losses, though at a slower pace than earlier in the cycle. Industrywide loan loss reserves increased to $224.3 billion, a 1.7% rise from a year earlier.

The reserve coverage ratio, which compares reserves to noncurrent loans, ticked up to 179.4%, suggesting banks remain well-positioned to absorb potential losses. Provisioning growth was concentrated in consumer lending categories, particularly cards, where credit quality has declined a bit.

Loan Quality Stable, Consumer Credit Weakens

Broadly, the industry’s loan quality metrics remain solid. Provision expense rose to $30 billion in the quarter, influenced by accounting for one large acquisition (the Capital One/Discover deal); excluding that, provisions would have edged down from Q1 2025 and from a year earlier.

But in credit cards, the net charge-off rate climbed to 4.34%, 86 basis points above pre-pandemic levels. Auto loans also showed modest increases in loss rates, though levels remain lower than cards.

Commercial credit quality was steadier. Noncurrent commercial and industrial loans declined slightly to 0.65% of balances, while noncurrent commercial real estate loans held at 1.38%, suggesting that stress in office markets has not yet translated into broader deterioration.

Banks’ deposit bases continued to shift, though with signs of stabilization. Total domestic deposits increased $101.5 billion (0.6%) in Q2. But the mix of deposits is changing: insured deposits fell by $87.3 billion, while uninsured balances rose by $186.6 billion as larger depositors sought flexibility.

While delinquency and charge-off rates remain below levels seen during the global financial crisis, the speed of deterioration may bear watching.

Overall, while the industry continues to report strong asset quality by historical standards, the FDIC cautioned that “the banking industry continued to have strong capital and liquidity levels, which support lending and protect against potential losses. At the same time, institutions continue to navigate weakness in certain loan portfolios and elevated unrealized losses, among other challenges.” 

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