Problems--but not catastrophes--await America's banks.

As falling home prices push ever more homeowners into financial trouble and the stresses on the economy pile up, some banks and thrifts are almost certain to fail. But a key group of banking regulators told U.S. Congress that major institutions appear secure, and they're confident they can handle further fallout. This time, they know big risks are still out there.

"While the vast majority of national banks have the financial capacity and management skills to weather the current environment, some will not," said John Dugan, comptroller of the currency at the U.S. Treasury Department. "Of these, some will be able to find stronger buyers--in some cases, at our insistence--that will enable them to avoid failure and resolution by the Federal Deposit Insurance Corporation."

Several points of data indicate a rocky road for banks. According to the Federal Deposit Insurance Corp., the amount of non-current loans, those more than 90 days behind, on the portfolios of its institution has grown rapidly. In the last three months of 2007 and the first three months of 2008, the value of these loans rose by $53 billion to represent 1.71% of all loans from FDIC-insured institutions.

In the case of bank collapse, the FDIC has to step in to insure the value of deposits. Normally the FDIC attempts to maintain a fund at 1.25% of the value of its potential obligations. In recent months, however, this fund has slid to 1.19%, driven primarily by a rise in deposits, said Sheila Bair, chair of the FDIC. If this figure slides further to 1.15% it forces the FDIC to make moves to shore up the fund.

Bair said the FDIC is monitoring 90 institutions with assets of $26 billion that it has identified as troubled. The entire size of the FDIC reserve fund is $52 billion. As a precaution, the FDIC is running bank failure readiness exercises, she said.

Though cause for attention, the situation is not nearly as dire as the banking crisis of the early 1990s. The 90 institutions being watched is comparatively miniscule--at the end of 1991, the FDIC had 1,430 institutions with $837 billion in assets.

Other banking regulators agreed the situation was relatively calm. John Reich, the director of the Office of Thrift Supervision said that the number of thrifts on its troubled watch list has risen to 17 from 12 at the end of March. In perspective, however, over 200 such institutions were in trouble in 1992.

Credit unions face "isolated, but not systemic problems," said JoAnn Johnson, chairman of the National Credit Union Administration.

The regulators mostly agreed that regulatory lapses were partly to blame for the current turmoil facing banks. The FDIC's Bair said that "regulatory arbitrage," where those seeking to underwrite mortgages sought out the least regulated venue to underwrite, contributed to the crisis.

"The same rules need to apply to anyone who originates a mortgage," said Treasury's Dugan.

Perhaps the most positive sign for the industry, however, is that the surprise factor is gone. "I think we have a stronger set of investment banks than we had a month and a half ago," said Donald Kohn, the vice chairman of the U.S. Federal Reserve's board of governors. Falling home prices and underperforming loans have been priced into the market.

Difficulties in banking are likely to continue until the housing market begins to turn around. At least now, for banks and regulators, it won't be a surprise.

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