Sunday, November 21, 2010

Is your bank likely to fail?

I just came across this article about risky banks. It lists the riskiest ones--organized alphabetically by state.

I haven't heard too much about the current banking crisis. Nothing like the S&L crisis of the late '80s. Of course, that's because it is nowhere near as large . . . yet. (According to Wikipedia, "Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance." Meanwhile, "From 1986 to 1995, the number of federally insured savings and loans in the United States declined from 3,234 to 1,645." The "U.S. General Accounting Office estimated cost of the crisis to around USD $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government from 1986 to 1996." --By contrast, there have been all of just over 300 bank failures so far in the last three years--25 in 2008, 140 in 2009, and 149 so far in 2010, and the cost to the FDIC and/or federal government has been just under $60 billion.)

Still, it can't hurt to be aware of the risks you face. As the risky banks article--updated as of a week ago--notes,
In a typical year, a bank should expect to lose about 32 cents for every $100 it lends. Right now, however, banks are losing $2.64 on $100 in loans.

This problem is made worse by bank's deteriorating financial condition. At the beginning of 2007, banks had $1.80 in cash reserves for every dollar of loans that were past due. So even if all those loans went belly up -- and not all past-due loans will -- the banks were more than covered. Today, banks have only about 80 cents for every dollar of problem loans.
And, of course, that is banks in general.

So how can anyone tell if a bank is at risk of failing?
The FDIC does not release its problem loans list, it only says how many banks are on it. But using a special ratio that measures a bank's problem loans (the precursor to the loans that are eventually charged off), investors can determine with a high degree of accuracy whether their bank is safe.

It's called the "Texas ratio." It was developed by a financial wizard at RBC Capital Markets named Gerard Cassidy, who used it to correctly predict bank failures in Texas during the 1980s recession, and again in New England in the recession of the early 1990s.

The Texas ratio is determined by dividing the bank's non-performing assets by its tangible common equity and loan-loss reserves. Tangible common is equity capital less goodwill and intangibles. As the ratio approaches 1.0, the bank's risk of failure rises.

With only 3 exceptions, every bank that has failed in the second or third quarter has had a Texas ratio greater than 0.90.
There are an awful lot of banks with Texas ratios over 0.90! There are 94 with ratios over 2.00!

Check out the list and do a "Find" on your bank's name. "And if your bank has a high or even a higher-than-average Texas ratio, then for heaven's sake go in tomorrow and close your accounts. It's always best to get out of Dodge ahead of the posse."
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