EDITOR NOTE: The FDIC has cleared the path for corporate giants like Apple, Facebook, Google, and Amazon to become "industrial loan companies" on April 1st, 2021. The FINAL RULE will give the U.S. Banking sector a run for its money as these non-fiduciary, non-bank institutions get into lending. Before this digitization of everything occurs, you must familiarize yourself with the Texas Ratio Trend, a measure of your bank's credit troubles and determine if your bank is at risk. A higher Texas ratio indicates more severe credit troubles. The regional banking index (using KRE as a proxy) has been on a steady uptrend since March of last year. These are your neighborhood banks, most serving small businesses (yes, including your ma and pa shops) across America. Whether to deposit your funds or for a small business loan, if you rely on your bank, it helps to know just how solvent your institution is. The link below shows you the Texas ratio of each bank in addition to other assessment tools. Give it a try. Check your bank to see how it might measure up. If your bank happens to score poorly, then seriously consider changing your bank, or better yet, moving your money into non-Fungible, non-CUSIP Gold and Silver because the American Bankers Association isn't tracking it. Regional bank failures are more common than you think, and the FDIC's Final Rule has granted billions of dollars in additional funding to prepare for a windfall of chaos. Prepare now, before the bank failures happen; it helps to know the steps you can take to anticipate, survive, and even thrive from the event.
The global financial crisis of 2008 has prompted many to take a second look at the health of their financial institutions. Many banks and credit unions were not as financially healthy as many believed. How many banks and credit unions have actually failed? Have things improved? What about the “Too Big to Fail” banks? Which states are home to the healthiest and riskiest banks? Where does your bank rank? Click through the below slideshow to find out.
If you are not concerned about the financial health of your bank or credit union, you should be. Many folks assume that because their accounts are protected by the FDIC or NCUA, there is nothing to worry about – even if the financial institution fails. While this is largely true as long as you are below the $250,000 maximum insured limit, there are a number of inconveniences associated with having your money in a failed bank or one that is on the verge of failing:
- (Before failure) Decline in services and new offerings: A bank that is on the verge of failing is likely to be in cost-cutting mode, which often means a reduction in staff, services, and new offerings (including other financial product offerings that you may need such as loans).
- (Before failure) Lower interest rates on deposits: The FDIC may apply rate caps for less than well capitalized banks. This has caused several banks to make substantial rate cuts to their reward checking accounts.
- (Before failure) Lower value on brokered CDs: Brokered CDs issued from weak banks are worth less on the secondary market than CDs issued from stronger banks. If you need the money from a brokered CD, it must be sold on the secondary market. You'll get back less of your money if the brokered CD is from a financially weak bank.
- (Upon failure) Delays in getting your money: If the FDIC or NCUA does not have another institution lined up, you will have to wait up to three weeks for a check in the mail.
- (Upon failure) Fees and hassles: If a bank is closed without another bank assuming the deposits, un-cleared transactions are sent back. This can result in fees, interruption in service, and other problems.
- (Upon failure) CD rate cuts: CD rates are often lowered after a closure. Without a closure, the CD rate lasts until the maturity date. However, when another bank assumes the deposits of a failed bank, the new bank is free to lower the rates on existing CDs.
- (Upon failure) Hassles (or worse) for borrowers: If you are also a borrower with your failed bank, your complications may expand exponentially. At minimum, you can expect your monthly payment procedures and contacts to change (if you don’t shop around and refinance with a new bank altogether). For those that have delinquent loans, lines of credit, or certain types of business loans, the list of new fees, costs, rate changes, and other roadblocks that you may experience can be long and unpleasant!
How Do You Know if Your Bank is at Risk?
The FDIC and NCUA each maintain a watch list of banks and credit unions they believe are at risk of failing, but they keep these lists secret in order to prevent panic among customers at those institutions, resulting in more failures. They do, however, publish the raw financial numbers for each institution every quarter. It is possible to use different formulas with this data to determine the financial health of banks and credit unions. DepositAccounts uses its own proprietary formula to assess the financial health of all federally insured banks and credit unions in the US. Peruse some of the key components of the formula that are discussed below, and then see how your bank or credit union measures up by using the search box below.
Developed at RBC Capital Markets, the Texas Ratio is a relatively straightforward and effective way to determine the overall credit troubles experienced by financial institutions. It is determined by comparing the total value of at risk loans to the total value of funds the bank has on hand to cover these loans. At risk loans are any loans that are more than 90 days past due and are not backed by the government. The amount of funds on hand consists of the loan loss allowance that the bank has set aside plus any equity capital.
For example, a bank with $65 million in at risk loans and $72 million in cash on hand to cover those loans would have a Texas Ratio of $65mm / $72mm, which is 90.3%. This figure is approaching the 100% threshold, which is considered very risky. You can also look at the trend in this Texas Ratio as an additional factor to tell if the bank's financial health is heading in the right direction.
When people put money in a bank, it is an indicator of confidence. It also increases the money that a bank has on hand and can help strengthen the balance sheet of the bank. You can look to see the amount of total deposits that a bank has and look to see whether they have been increasing over time. A strong track record of stable growth is an indicator of consumer confidence and the bank's ability to strengthen its balance sheet. The opposite can be an indicator of a decline in confidence in the institution and, if pronounced and prolonged, can mean that the bank’s ability to keep a strong balance sheet is in jeopardy.
Another quick, at-a-glance indicator of bank financial health is its available capital. You can figure available capital with a direct calculation of an institution’s assets minus its liabilities. Stronger capital means that more assets are available to cover potential losses.
How Does Your Bank Measure Up?
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