Surprisingly, This Time It Isn't Sen. Schumer's Fault

I know that it is currently in fashion to speculate on whether Charles Schumer caused the recent run on Indymac Bank. Now, I'm no fan of Sen. Schumer's politics, but I've always liked his style, so I'm going to defend him on this one.

In fact, you just need to look at the numbers to know that Indymac was a disaster just waiting to happen. Look at its Texas ratio. What's a Texas ratio? The Texas ratio is a formula worked out by economists at the Royal Bank of Canada during the series of Texas bank failures during the 1980s. It is calculated by dividing a bank's non-performing loans, including those 90 days delinquent, by the company's tangible equity capital plus money set aside for future loan losses. The RBC economists noted that banks almost inevitably fail when this ratio reaches 1:1, or 100% or greater.

What was Indymac's Texas ratio? 140%. A disaster jut waiting to happen. Remember the failure of ANB Financial National Association back in May? ANB had a Texas ratio of 344%!

Now, a recent study by Research Associates of America lists 10 banks with a Texas ratio over 100% in the US:

Colorado Federal Savings Bank	Greenwood Village	CO	244.8
Eastern Savings Bank, FSB	Hunt Valley	MD	222.7
Integrity Bank	Alpharetta	GA	191.6
Ameribank, Inc.	Welch	WV	153.7
First Priority Bank	Bradenton	FL	122.6
First Security National Bank	Norcross	GA	112.1
Magnet Bank	Salt Lake City	UT	110.4
Security Pacific Bank	Los Angeles	CA	102.8
First National Bank of Brookfield	Brookfield	IL	102.1
The State Bank of Lebo	Lebo	KS	100.6

Now, that's not a guarantee those banks will fail,but I for one would think long and hard before investing or depositing in any of those banks. The bigger US banks are better, but still uncomfortably high in their Texas ratios, in my opinion. Wachovia, for example, is at 78%, according to that impeccable source YahooAnswers.

Contrast that with the well-regulated Canadian banks (Canada has the best banking system in the world): Bank of Montreal has a Texas ratio of 11%; Bank of Nova Scotia 10%; Royal Bank of Canada 8%; Canadian Imperial 8%; National Bank 5%; and Toronto-Dominion Bank 3%. Now, I actually think that the Canadian banks could stand to be a little more risky with their Texas ratios, especially now that their gargantuan record profits are starting to slip, but I actually have full confidence in the Canadian banking system to come out on top, so I'll trust management on this one.