Texas Ratios & When To Worry

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by Dave

Boy, I don’t have any stats for the Texas Ratio for banks that failed.  That would be a good number to have.  It’s also political; I’m sure the rank-and-file regulators want to pull the plug sooner rather than later, but the decision of when to do that is (I’m guessing) “sensitive to politics”.

Certainly, a ratio of > 100 means the bank should be taken down immediately, because if it continues to exist, it will chew through depositor (and thus FDIC reserve) money since presumably the management that made all those bad loans will just continue to do so.  That’s where a large number of Italian banks are right now.

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Ultimately it depends on where we are in the cycle.  I wouldn’t be worried about a ratio of 10, today.  I’m at US Bank, and it has a ratio of 10 too.  20+, at this moment in the “puppies and ice cream” phase of the economy, is probably a bad sign and I’d consider switching banks.  Or at the very least, be prepared to remove your deposits when things start to turn down.  I have mine hooked up to Treasury Direct, and can suck the account dry at whatever auction comes next.

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Here’s another fun chart, this time from FDIC.  You can see that 2018’s “0” failures looks a whole lot like 2005.  Or 2006, take your pick.  Y’all know what comes next, right?

IndyMac’s Texas Ratio was 116 when the FDIC took it down in 2007.

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