Saturday, July 19, 2008

"Texas ratio"

Of predictions for future bank failures, the "Texas ratio" is entering the jargon. It's basically the ratio of bad loans to assets. In a post titled Texas Ratio Predictor of Bank Failure - Maybe - Maybe Not the mortgageinsider notes that it is the ratio of a bank’s non-performing loans, including those 90 days delinquent, to the company’s tangible equity capital plus money set aside for future loan losses.

The Texas Ratio was invented after the savings and loan collapse in the late 80s that hit Texas so hard. A bank with a Texas ratio over 100 may have problems.

Research Associates of America, non-profit in DC, has compiled a list of 10 more U.S. banks with a Texas Ratio of 100 per cent or more. RAA's expertise has been questioned.

Downey Savings and Loan in Newport Beach, Calif. is at 96.

The mortgageinsider suggests the "Texas ratio" is not a definitive predictor:

If a bank has a high Texas ratio due to heavy C & D lending and they lent at low LTVs, then the answer is “yes” [the bank is safe]. The projects in default will be foreclosed on, sold to new developers, and the assets returned to the bank with no loss.

See also

CBS News story of 19 July 08
IPBiz notes the Texas ratio is hardly a secret formula.


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