Bank failures to surge in coming years

My blog title comes from the title of an article, "Bank failures to surge in coming years" by MarketWatch on 23 May 2008. I highly recommend reading the full article. It mentions that only 3 banks have actually failed so far in 2008. But that number will go much higher as distress from the credit crisis increases. The articles goes on to mention a great metric called the Texas ratio, invented by RBC Capital markets during the oil downturn in 1980’s Texas in order to rate the solvency of Texas-based banks.

Wikipedia says:

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.

Later in the MarketWatch article, it shows a few banks which have seen their Texas ratio jump dramatically. All of these are local and regional banks. They represent the next leg down in the credit crisis in the US.

• UCBH Holdings (UCBH) Texas Ratio jump to 31% at the end of the first quarter from 4.7% in 2006, according to RBC.
• Colonial BancGroup (CNB) Texas Ratio jumped from 1.5% in 2006 to 25% at the end of March.
• Sterling Financial Corp. (STSA) had a Texas ratio of 1.9% in 2006. It was nearly 24% at the end of the first quarter.
• National City Corp. (NCC) had a Texas Ratio of 40% at the end of March though the bank did raise $7 billion in new capital in April.
• IndyMac Bancorp (IMB) has a whopping Texas Ratio of 140%*

See also: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.