Texas Ratio – Bank Failures

With the recent failure of Indymac Bank and the ensuing issues at Fannie Mae and Freddie Mac many people are starting to take a look at the Texas Ratio. The Texas Ratio is a calculation which shows how likely some banks are to fail. The definition of a Texas ratio is:

The Texas ratio is a measure of a bank’s credit troubles. Developed by Gerard Cassidy and others at RBC Capital Markets, it is calculated by dividing the value of the lender’s non-performing loans by the sum of its tangible equity capital and loan loss reserves.

In analyzing Texas banks during the early 1980s recession, Cassidy noted that banks tended to fail when this ratio reached 1:1, or 100%. He noted a similar pattern among New England banks during the recession of the early 1990s.

Apparently this is one of main calculations that the federal reserve uses when deciding which banks should go on its troubled bank list. The federal reserve shocked a lot of people last week when it stated that it now had at least 90 banks on its troubled bank list and some analyst estimate there could be as many as 150 banks who are close to being placed on the list. The Federal reserve does not actually release the bank names who are on the list, but earnings reports can be a good indicator of which banks may be on the troubled banks list and thus have a chance of failure.

Many people are concerned about these developments and rightly so as if you are unlucky enough to have money in one of the failed banks then even if its insured by the FDIC, your money could be frozen for a time while all the paperwork and investigation is done. This is not good for people in an economy such as we have as many people are feeling the crunch of the high gas prices. These continued fears could send the economy into an even deeper recession and many people are now starting to talk about depression.

 

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