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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Senate Banking Committee Speeches
Wall street has had a dreary outlook lately. This lackluster performance comes form fears about the credit market, to rising energy costs, the FDIC’s list of troubled banks. The Federal reserve chairmen Ben Bernanke did not help the mode this morning at the Senate Banking Committee:
"The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth," Bernanke said in a speech to the Senate Banking Committee this morning. "At the same time, upside risks to the inflation outlook have intensified lately."
Inflation "seems likely to move temporarily higher in the near term," Bernanke said.
Bernanke also highlighted the problems in the financial markets, which he said remain under "considerable stress."
"Helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve," Bernanke said.
This is not good news for an economy which is increasingly coming under pressure. Yesterday the FDIC added to its list of troubled banks and there has been a multitude of fear surrounding the collapse of the IndyMac Bank as well as many fears about the financial state of Fannie Mae and Freddie Mac. These are all issues that must be addressed or our economy is going to continue to worsen as time goes along. Many Americans are already feeling the crunch of the sagging economy and there seems to be no end in sight.
Since it does not appear we have any leadership in Washington either in any office or running for an office, then there does not seem to be a light at the end of the tunnel. As I type the markets are slumping with the Dow Jones off another 130 points today to go along with yesterday’s decline. Obama is giving a speech where he is talking about what we should have done and not what he plans to do. No leadership any where by anyone. No telling where we will end up next.
FDIC Troubled Banks List
The FDIC has been reporting all weekend about some large banks that are showing signs of definite weakness. While the FDIC sees some improvement in the banking industry there are still some serious problems. The troubled Banks include some big names and there are some real issues in California.
"It looks like a couple of larger banks landed on the troubled list," said Tanya Azarchs, a banking analyst at the Standard & Poor’s Corporation, a rating firm which watches the health of banks and watches for Troubled signs of potential failure.
Although analysts do not know which banks were added to the list, they noted that individual banks’ earnings reports provide a good clue to the banks experiencing the greatest trouble.
The chairman of the F.D.I.C., has said that 11 of the nation’s 50 largest banks lost money last year. He did not indicate which of those banks also had enough problems with their financial strength, management and bad loans to be included among the 1,069 banks on the troubled list. Three months earlier, the troubled list included 1,081 banks.
In California, where the downturn in real estate prices came later than in other regions, the F.D.I.C. said losses totaled $379 million in the fourth quarter, down sharply from profits of $447 million in the year-earlier quarter.
Looking at the earnings from some of the larger banks who may be in trouble could include: Security Pacific Corporation, which lost $774.5 million, and First Interstate Bancorporation, which lost $288.1 million, both are based in Los Angeles California, Wells Fargo & Company, in San Francisco, suffered losses late in the year but managed to eke out a $21 million profit for the year.
Other banking companies among the 50 largest in the country that lost money last year included Citicorp, Midlantic, Shawmut National of Boston, Continental Bank, MNC Financial, Bank of Boston, and Signet Banking,
This will be some interesting developments as new earnings are released by Banks. This is getting scary as if a large number of Banks where to fail then we would be looking at another great depression. And we don’t have FDR or anyone close to him to bail us out this time.
Here is an interesting book that I bought this week to educate myself a little on what exactly happens during a bank failure and signs that a bank could be in danger of failing.
| Bailout: An Insider’s Account of Bank Failures and Rescues by Irvine H. Sprague |