The Texas Ratio attempts to measure how well a bank can cover its losses on nonperforming loans. A ratio over 100 indicates the bank is in trouble.

I cross referenced the texas ratio for banks obtained from here (last updated 10/2009) with the latest list of bank failures from the FDIC (last updated 8/2010).

The ratio does appear to be a fairly good indicator of banks that go belly up. alt text

If my bank has a ratio over 100 I would move my money to a safer bank. Especially since the FDIC is broke.

Would you move your money?
What Texas Ratio threshold would you tolerate?
Would you leave your money in a high texas ratio bank if the amount was covered by FDIC?

UPDATE: Many of you will be happy to know that the FDIC is looking to provide UNLIMITED coverage (instead of the current $250,000 limited coverage) for checking accounts. Of course, the FDIC is still broke but why let that stop them.

UPDATE (12/10/2010): Bank closures continue to rise and bring the FDIC to it knees:

The 151 closures nationwide so far this year tops the 140 shuttered in all of 2009 and is the most in a year since the savings-and-loan crisis two decades ago.

The growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $8 billion as of Sept. 30.

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    While I tend to disagree with your outlook on the future, I really appreciate your reasoned questions. I hope you won't take my negative responses poorly; I really hope you keep asking questions that challenge my point of view. – MrChrister Aug 23 '10 at 4:13
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    I have no issues with people disagreeing with my point of view. Others can find flaws in my thinking and analysis, which I am very receptive to - such as the painstaking process of stacking nickels.:) – Muro Aug 23 '10 at 11:20
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    Should be CW. This is very subjective. – JohnFx Aug 23 '10 at 14:48
  • @JohnFx - OK, cw it is. – Muro Aug 23 '10 at 15:21
  • Great question by the way, really made me think and read about things yesterday! – MrChrister Aug 24 '10 at 19:30

There's obviously a lot of discussion surrounding your question, but if I thought a bank was going under, then yes, absolutely I would withdraw my money.

Now, we can debate whether me thinking the bank was going under was foolish or not, but if I truly believed it, I can't see why I would sit around and do nothing.

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    I'm a little surprised at the number of people who would just leave their money in the bank and hope the government will take care of them. I'm glad to see there is at least one other person who would take action instead of depending on such things as "hope" and "faith" - especially in government. Reminds me of a quote "A slave is one who waits for someone to come and free him.", Ezra Pound. Applied in this context "An American is one who waits for the government to come <insert entitlement here> him." – Muro Aug 24 '10 at 16:22
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    Bank failures due to a run on the bank are self fulfilling prophecies. If you've had a good relationship with your bank and you don't feel they've been particularly irresponsible, leave your money rather than doing your part to kill your bank. Diversifying into a couple of banks is actually a wise move for better access in a pinch, given some of the problems that have been exposed by the current crisis. – SpecKK Aug 29 '10 at 9:03

If the FDIC didn't insure your deposit, there would be a run on EVERY bank, so there is no way the government will let it fail or go broke. It will be backstopped one way or another. So I wouldn't worry about losing my money.

The only worry is the hassle of having to deal with the bank failure and getting at your money and getting it out. There could be a few days of illiquidity while the government is stepping in to sort things out. If that scares you or would be a big problem, then I'd find a safer choice.

  • Banks runs are the only thing that keep fractional reserve banks from lending out every last dime. They may be making a come back. – Muro Aug 24 '10 at 3:42
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    I think our society is far to dependent on electronic transactions for the majority of people to actually make a run on a bank in the classic sense. Furthermore, if the rates of savings in the US today is any indication, the majority of people have little money in the banks to begin with. – MrChrister Aug 24 '10 at 4:17
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    Never mind that comment - ask Washington Mutual if people will run on a bank. Largest FDIC failure in history after a 10 day run according to en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation – MrChrister Aug 24 '10 at 5:05
  • Yes...bank runs could become in vogue again. How 1930's that would be. – Muro Aug 24 '10 at 14:30
  • icelandic banks only recently experienced a major and, imho, valid bank run. – NimChimpsky Oct 1 '10 at 12:10

I have two different thoughts on this subject.

  1. The government has no business insuring private companies (like banks). That just encourages the banks to take more risks because the feedback loop of going bankrupt is non-existent. So in the case where the government is not insuring the bank then we all would keep a better eye on the bank's stability and I would move my money asap.
  2. Since we do have the FDIC, there is no urgency for you to move your money. For one thing your bank might get purchased and you'll never see a disruption of service (happened to me with Netbank being bought by ING). If a purchase does not happen then the worst case scenario is you have to wait about a week to get a check from the FDIC. If waiting a week for your assets in this bank would hurt you then you should move your money.
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    I heard on the radio a worse case scenario - the buying bank lost records of the failed bank and a man had to wait better than a year to get his $5000 back. – MrChrister Aug 23 '10 at 16:07
  • @MrChrister. ouch. – mpenrow Aug 23 '10 at 16:19

To the average consumer, the financial health of a bank is completely irrelevant. The FDIC's job is to make it that way. Even if a bank does go under, the FDIC is very good at making sure there is little/no interruption in service. Usually, another bank just takes over the asset of the failing bank, and you don't even notice the difference. You might have a ~24 hour window where your local ATM doesn't work.

I also really question the "FDIC is broke" statement. The FDIC has access to additional funding beyond the Deposit Insurance Fund mentioned in your link. It also has the ability to borrow from the Treasury.

If you look into the FDIC's report a bit closer, the amount in the "Provision for Insurance Losses" is not just money spent on failing banks. It also includes money that has been set aside to cover anticipated failures and litigation. Saying the FDIC is "broke" is like saying I am "broke" because my checking account balance went down after I moved some money into a rainy-day fund.

Failure of the FDIC would signal a failure of our financial system and the government that backs it. If the FDIC fails, your petty checking account would be meaningless anyway. The important things would be non-perishable food, clean water, and guns/ammo.

That said, it will be interesting to see the latest quarterly report for the FDIC when it is released next week. The article implies things will look a little better for the FDIC, but we'll see.


I probably would not take it out, since I have enough layers of backstops:

  • the FDIC is the ultimate "too big (or important) to fail" institution; I don't care if it's "broke" (they'll just charge banks more in the future to pay back taxpayers)
  • I don't anticipate too much inconvenience if my bank is taken over. (Maybe if it were a smaller bank.)
  • If things did get obnoxiously inconvenient, I have accounts elsewhere, including a brokerage account and credit cards
  • With regards to bills: my landlord would be understanding (he's pretty chill like that), the rest of my bills are quite modest and generally are processed through my credit card anyway
  • In a real crunch, I wouldn't feel bad about asking my parents for some cash I could pay them back in a little while (since we both know I have plenty of money)

Maybe if I could find a better rate. :)

  • The FDIC is another "too big to fail" institution? Any idea on how many more of these there are? – Muro Aug 24 '10 at 3:39
  • @Muro -I think our government is the only "too big to fail" entity we should allow. Lets break up the large banks and try to institute some competition and creativity in the market again. – MrChrister Aug 24 '10 at 4:19
  • If the "too big to fail" government hadn't interfered the banks would have been broken up by their bankruptcies and liquidation of assets. – Muro Aug 24 '10 at 14:29
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    @Muro - The FDIC isn't really another too-big-to-fail, it was really the original. If the FDIC fails, don't worry about your money; it'll be worthless anyway. – user296 Aug 24 '10 at 16:56
  • @fennec - There were bank runs before the FDIC existed. The last person to attempt to withdraw their money from the bank did not get their money. The money, however, still had value - it did not become worthless. It's just that not everyone got their money back since the bank had loaned most of it out. – Muro Aug 24 '10 at 18:27

The article you link scares me; but I still have faith that the FDIC will keep me protected. Personally, if the FDIC goes broke, there is something more fundamentally wrong with the government as a whole and dollars won't worry me much.

There are lots of issues with the FDIC, and I think the answers lie outside of simply printing more money and funding the FDIC further. There is likely more bad before this storm is over, and I might be ignorant, but I still want to operate normally.

My money would stay where it is with things being how I see them in today

  • Mmm, make sure you're not confused: "printing money" and "funding the FDIC" aren't quite the same. The Federal Reserve won't conjure up the FDIC any money directly; they'll go through the Treasury and add to the deficit, so the government borrows money, and then Fed conjures a little money to buy the bonds and keep interest rates where they want them, and the banks make loans with that money expanding it a few more times. – user296 Aug 23 '10 at 16:50
  • Kinda what I meant. The FDIC issues and bank failures bother me, but I don't really have a better solution. I was just being flippant. – MrChrister Aug 23 '10 at 17:30
  • So the government is massively in debt and borrowing records amount of money, the FDIC is in the red, the foreclosure rates are still rising (msnbc.msn.com/id/36547572) which means the nonperforming loans at banks will continue to grow and you still have faith that the FDIC will keep you protected? Is there somewhere else the FDIC is going to get the money from? It's almost as if you are crossing your fingers and hoping for the best. – Muro Aug 24 '10 at 3:37
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    @Muro - more like faith in our government. Money can come from higher taxes, fewer programs and bonds and such. This isn't the first crisis we have faced as a nation and it isn't the last. We need voices like yours to keep us in balance though lest we become to complacent. If things don't change we are in trouble, but things are already changing. – MrChrister Aug 24 '10 at 4:12

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