3 Ways to Know if Your Bank is in Trouble

Posted by 3 August, 2008

This topic of conversation came up during a real estate investors’ meeting this past Saturday. We were trying to
figure out ways to determine whether or not our banks were
in trouble. Gerard Cassidy and his colleagues at RBC Capital report that AT LEAST 150 banks will fail over the next year (Marketwatch). While there most likely isn’t a whole lot to worry about IF you have under $100,000 in an account with your bank, it’s good to stay on top of your finances.
I just happened to see a link that J.D. at Get Rich Slowly
posted here to Bankrate.com. They rate all of the banks
around the country based on their CAEL rating. The CAEL rating measures capital adequacy, asset quality, profitability, and liquidity. The rating system is shown below and is based on a star system of 1-5 stars with 5 starts being the best, or safest in this case:
Safe & Sound CAEL rating system
Safe & Sound CAEL rating
Definition
Star rating
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A second way to know if your bank is not doing so hot financially is to check on their Texas Ratio:

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.
(wikipedia.org)

Thirdly, visit Bauer Financial’s website. They are a third-party that ranks banks and credit unions:

“BauerFinancial, Inc. has been analyzing and reporting on the financial condition of the nation’s banking industry since 1983. With our help, countless depositors successfully navigated their way through the savings and loan crisis of the ’80s when others lost billions of dollars in uninsured deposits. Through the years BauerFinancial has earned the reputation of “the nation’s bank rating service”. Hundreds of newspapers depend on our ratings for their readers and federal and state regulators refer thousands of inquirers to us each year.”

Most of your larger banks are “secure” meaning that the government would not allow some of the larger institutions to “go under” because of the overwhelmingly disastrous national consequences. While this is comforting, and the FDIC insures up to $100,000 per account, it’s certainly nice to be aware of your bank’s status for the peace of mind it may bring you.

On another note, I just got this published on my first carnival, carnival of personal finance. Go Check it out here.


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