Many Bank Failures Easy To Predict
Evaluating the financial health of a bank is a complex process which requires an in depth analysis of a bank’s financial statements. Most bank depositors would be ill equipped to assess whether or not a particular bank might be in financial difficulty.
There is, however, one simple concept that is easily understood – a bank with a large number of loan defaults will probably wind up failing. An easy way to get an assessment of a bank’s ability to withstand loan losses is available at Bank Tracker which calculates a bank’s troubled asset ratio.
Bank Tracker defines the troubled asset ratio as follows:
The “troubled asset ratio” is not an FDIC statistic. It is derived by adding the amounts of loans past due 90 days or more, loans in non-accrual status and other real estate owned (primarily properties obtained through foreclosure) and dividing that amount by the bank’s capital and loan loss reserves. It is reported as a percentage.
The predictive value of Bank Tracker can be seen by correlating the “troubled asset ratio” to the bank failures that have occurred this year. According to Bank Tracker:
…the troubled asset ratio apparently is a strong indicator of severe stress inside a bank because it shows the bank’s ability to withstand loan losses. Of the 92 banks that have failed so far this year, 84 had troubled asset ratios of 100 percent or greater in the final quarter they reported data before they closed.”
Georgian Bank Example – Delaying The Inevitable
Last week’s latest banking failure of Georgian Bank provides a good example of the predictive value of Bank Tracker. Based on Georgian Bank’s latest financial statements, Bank Tracker calculated a troubled asset ratio of 198%.
The Georgian Bank failure is also instructive in exposing banking regulators’ policy of allowing banks that are “walking dead men” to remain open far beyond the point at which they should have been closed. The failure of Georgian Bank also raises serious questions regarding the integrity of financial statements being issued by the banking industry. As recently as August, Georgian Bank’s CEO stated that the bank was “adequately capitalized”, yet weeks later the bank fails.
The FDIC’s estimate of losses on the closure of Georgian Bank amounted to$892 million, representing a massive 45% of Georgian Bank’s assets. The FDIC’s loss estimate makes it clear that Georgian Bank was materially under reserved on its loan portfolio. The obvious implication is that there are probably many more “Georgian Banks” out there carrying loan assets at values far in excess of their ultimately realizable value.
Given the small balance in the FDIC’s insurance fund and the rapidly increasing number of banking failures, the Georgian Bank fiasco provides little comfort that the banking crisis is anywhere near being resolved.