The Good Ol' Texas Ratio

From the awesome website lolfed.com, which is tropes on lolcat.com, which is itself a poor version of icanhascheezburger.com, comes the following post, reprinted here in full, as I could not link to it:

There’s an antiquated notion that, perhaps, banks should have more equity and loan-loss reserves than they do nonperforming loans. It comes in handy when banks try to do things like not fail.

In the 1980s, a metric came out of RBC Capital Markets (best associated with Gerard Cassidy) called the “Texas Ratio,” so named for the performance of banks in Texas during the 1980s, and retested in New England in the early 90s. It’s not so complicated; you divide the total of the bank’s nonperforming loans by its total equity+loan loss reserves, and if the ratio is 1:1 (or, worse, 2:1, or higher) you start Photoshopping the bank’s logo onto a sinking boat and posting about it on LOLFed.

Today, LewRockwell.com took this formula - with a variation to account for gov’t-guaranteed debts - and ran the numbers for all the banks in the United States. You might as well look your bank up, though it won’t necessarily give you a warm fuzzy feeling when you do it. A “100″ in their formula is the equivalent of a 1:1 Texas ratio, that is, a bank with bad loans equal to its reserves; any number higher than 100 means they already have more bad loans than reserves. There are a lot of banks to which that applies. Back in May, Cassidy ran the Texas ratio for US banks and predicted at least 150 upcoming failures. LewRockwell’s numbers are probably even less rosy.

Looking at the banks with the better Texas ratios, you will notice many of them have hit the TARP hard. Once our TARP application is approved and we become a bank holding company, we’ll be known as the LOLFed Bank of Bartertown and Cheap Scotch, N.A. We’ll do our best to keep our Texas ratio down.