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Bank accounts are insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor per insured bank.
Investigative reporter Bill Dedman of msnbc.com
By Bill Dedman Investigative reporter
NBC News
updated 3/17/2009 8:52:22 AM ET 2009-03-17T12:52:22

Foreclosures and bad loans raced through the banking industry in 2008, with the more than 8,000 U.S. banks registering a 149 percent increase in troubled assets, according to a new analysis of bank financial reports to the federal government.

While a large majority of banks were still healthy, 163 ended the year with more troubled loans than capital, up from only 13 a year earlier, according to the analysis of data from the Federal Deposit Insurance Corp. by msnbc.com and the Investigative Reporting Workshop at American University in Washington, D.C.

Nationwide, seven out of every 10 banks were less well prepared to withstand their potential loan losses than a year earlier. The analysis relies on information reported quarterly to the FDIC, calculating each bank's troubled asset ratio, which compares troubled loans against the bank's capital and loan loss reserves.

Although attention has focused on the largest banks, which hold the lion's share of deposits, the analysis shows how widespread the problems in the banking industry became in 2008 as the mortgage meltdown and broader recession unfolded. Msnbc.com is publishing information on the nation's 400 largest banks as well as all banks with high ratios of troubled loans at year’s end. And the American University group has created a new Web site, BankTracker, to provide information on the financial health of every bank in the country.

The American Bankers Association opposes the publishing of such figures for mainstream consumption. It said that no single figure can capture the complexity of the rapidly changing financial situation at an individual bank, and that the public may not be prepared to handle that information.

"Frankly, you could cause a run on a bank unnecessarily," said John Hall, ABA spokesman. "By widely publicizing this ratio, while the analyst community often uses it, when it's put in the general public's hands often they get confused and don't understand that this doesn't necessarily mean the bank can't come back to healthy status."

Consumers tend to want to act on information, Hall said, when that's unnecessary in this case, assuming their balances in any institution are within the limits protected by the FDIC. That limit is generally $250,000 per depositor per insured bank.

‘People may not understand the context’
The ABA's chief economist, James Chessen, agreed, saying, "In this environment where confidence has been shaken, it's easy to play into those kinds of fears, where people may not understand the context."

But a representative of the Independent Community Bankers of America, which represents 5,000 mostly smaller banks, said he didn't oppose the publishing of such figures.

"I think there's a distinction between care and concern," said Camden R. Fine, president and CEO of the organization. "You should not be concerned at all about any kind of monetary loss, as long as your deposits are within the FDIC limits.

"As far as caring about the health of your institution, or the institution you do business with, I think it's prudent for any consumer to have a basic understanding of how the bank is doing. Banks are required to report their statement of condition on a quarterly basis. People just have to understand that it's only a snapshot in time, and literally the day after that snapshot was taken, conditions could change positively or negatively."

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This troubled asset ratio isn't a predictor of the future. It doesn't show "who's next to fail." Bankers and regulators point out that some unhealthy banks have quietly gotten healthier, through state or federal supervision, better management, injections of additional capital, or because borrowers who were behind have been able to get current on their payments. Although the FDIC keeps a "troubled bank list," it does not make that list public, for fear of starting a panic among customers.

The year-end numbers also don't reflect the recent infusion of nearly $250 billion from the federal Troubled Assets Relief Program, or TARP. Banks may have also raised private capital during this time. And the numbers don't reveal certain exotic troubled assets that have contributed to the problems at the larger banks, such as mortgage-backed securities and collateralized debt obligations, meaning the ratios may underestimate the size of the problem at certain banks.

But like a high cholesterol level, it and similar ratios have been commonly used by regulators and analysts as one indicator of banks in need of closer scrutiny. It offers insight into a major problem that more banks are facing: the general risk of the deepening recession, combined with risky lending by certain banks.

'Horrendous decisions'
Fine, of the community bankers association, said he expects about 120 banks to fail this year. Over two years, that would make about 150, far below the more than 2,500 that failed in the agriculture lending shock of 1984-1992.

The community bankers have tended to portray the banking problems as isolated among the big banks, with their creation and use of mortgage-backed securities and other non-traditional instruments. The small banks have an advertising campaign, comparing Wall Street's recklessness with Main Street's quiet conservatism. As Fine says, "We're getting hit by the shrapnel of the explosions on Wall Street. That's wounding some of the banks and killing some of the others."

But Fine acknowledges that bad loans have risen at small banks, too, and not just because of the general recession. "You've got good bankers and you've got bankers doing not so good. Was there a percentage of banks that got caught up in the go-go hysteria? I'm sure there was. You had bankers who made horrendous decisions in community banks, and we've seen what the management of the larger banks did, which is a train wreck. But the vast majority of the 8,000, well into the 90th percentile, are doing well, or are victims of the general economic funk we're in, or happen to be in an area where the economy went to hell in a hand basket.

"When I look at the banks closed by the FDIC, about half of those that have failed would have failed in a very mild recession, because they just weren't very well run banks," Fine said. "They were barely hanging on anyway."

The following information will help you interpret the information on BankTracker, explaining what the numbers mean, what they don't mean, and what they reveal about the stress on individual banks.

Depositors are protected
Even when a bank does fail, no depositor has lost a dime in insured deposits since the FDIC was created in 1934.

The protection has its limits. The basic limit had been $100,000 per depositor per bank, but was temporarily increased in October to $250,000; it will return to $100,000 on Jan. 1, 2010, except for certain retirement accounts, which will stay at the $250,000 limit. The FDIC has more detailed information and a calculator to help you determine your level of protection.

If your deposits are under the FDIC limits, you're protected even if your bank fails. If your deposits exceed those limits, the remedy is to move deposits into smaller accounts at more than one FDIC-insured bank.

What's the trend?
There was a significant deterioration in 2008 in the ability of banks to withstand potential losses from troubled loans.

If a ratio of 100 is a sign of severe stress, then an additional 150 banks moved past that level in 2008, for a total of 163. That's 2 percent of the nation's banks.

Some analysts have said that any ratio over 20 percent is an early warning sign. An additional 1,349 banks moved past that level, for a total of 2,308. That's 28 percent of the nation's banks.

Most banks still have relatively low levels of troubled loans. But there was a doubling of the median troubled asset ratio for all banks in the U.S., to 9.87 from 4.94 a year earlier.

For banks with two years of data, the total of troubled assets rose to $235.29 billion at the end of 2008. A year earlier, for the same banks, it was $94.62 billion. That's an increase of 149 percent.

Out of 8,198 banks for which we have two years of data, 5,784 — or 71 percent — had a higher troubled asset ratio at the end of 2008 than a year earlier.

Only 1,974 banks, or 24 percent, showed improvement over the period. And 440 banks, or 5 percent, stayed the same.

The picture was worse for the largest 100 banks: 90 showed declining strength. Only seven improved, and one maintained the same ratio. (Two did not report data that could be compared: IndyMac Bank failed in July 2008 and was opened by the FDIC under a new name, IndyMac Federal Bank. Bank of China, in New York, did not report capital and reserves.)

The largest bank with a ratio over 100 is AmTrust Bank of Cleveland, which had a ratio of 130 at year end, or 30 percent more troubled loans than capital and reserves. AmTrust missed a year-end deadline set by its regulator to raise more capital. A spokeswoman, Donna Winfield said Monday in an e-mail, "We have, as previously reported, developed a comprehensive risk-reduction strategic plan that is designed to assure our long-term viability. We have every confidence that we can implement this plan successfully. In addition we are looking at opportunities to raise capital through actions such as our recent agreement to sell our Columbus branches."

Who calculated the ratio?
Wendell Cochran, senior editor of the Investigative Reporting Workshop, devised the ratio. A former business reporter for the Kansas City Star, the Des Moines Register and Gannett News Service, Cochran may have been the first journalist to create this measure of bank health. He did that while covering banking for the Des Moines Register in the early 1980s. Later, at Gannett News Service, he was involved in projects published at USA Today and elsewhere that calculated this ratio for every bank and savings and loan in the nation. Cochran now teaches journalism at American University.

Others do similar calculations. The most widely used is the so-called Texas Ratio, created during the 1980s by a banking consultant. You can find various formulas for calculating a Texas Ratio, but they are all attempts to measure a bank's ability to cover potential losses.

What does the score not tell us?
The troubled asset ratio isn't a picture of the bank today. As with any annual or quarterly report in business, there's a lag time before the numbers are reported. It's a snapshot — or in this case, two snapshots, showing the change from the end of 2007 to the end of 2008.

It doesn't reflect changes since Dec. 31, 2008. Many banks have had injections of capital in the form of federal TARP funds, and some have raised private equity. For example, Flagstar Bank in Troy, Mich., said it has raised an additional $622 million in capital (from TARP and from an investor), which would bring its ratio down to about 55, from 85 at year end. Changes since year end will be reflected in the March 31 quarterly report; the FDIC will release that information near the end of May. The TARP contributions allocated to individual banks are not known now, because the TARP funds are usually reported at the level of bank holding companies.

It doesn't include the value of non-loan assets that have caused so much trouble in the past year, particularly for some larger banks that moved away from traditional commercial banking. The ratio does not reflect mortgage-backed securities, collateralized debt obligations, etc. In this way, the ratio may underestimate the real depth of problems at some banks. The FDIC has scheduled "stress tests" of the portfolios of about 20 of the largest banks to attempt to measure their risk of problems under different economic scenarios.

It doesn't explain why a ratio is high or low at a particular bank. The past-due loans at one bank may be mostly credit-card debt, while at another bank they may be mortgages.

And no ratio can get at the detailed information — such as the individual loan files, quality of management, and potential for raising other capital — that a regulator will use to evaluate a bank's safety and soundness.

Michael L. Stevens is a former bank examiner in Iowa, and now senior vice president of regulatory policy for the Conference of State Bank Supervisors. He said ratios such as this are used by regulators, but are among dozens of measures that a regulator may use to prompt further questions. For the consumer, however, he said he sees no value in such ratios.

"I really think, for the consumer, their issue is deposit insurance. That is their protection," Stevens said. "They don't have to, they don't need to, do a financial analysis on these institutions. It shouldn't be of interest to you. If you're within the insured limitations, you're doing business with a bank that's convenient, that offers the services you need, why would you care? The information is certainly available, and they can certainly use it, but I don't see why you'd care."

If the numbers don't tell us which banks will fail, why publish them?
This measurement is one early warning sign of a change in health. Very high ratios, or large changes from year to year, raise questions which can be explored by the public, and which have implications for the communities that depend on healthy banks. It's only one measure, but a common one used by analysts inside and outside banking.

"Any statistical analysis has its limitations, and this one is no exception," wrote Cochran, the formula's creator. "However, the FDIC data provides the best public glimpse into the operations of a bank. And it is the duty and responsibility of the news media to help the public understand complex issues. It is also true that the troubled asset ratio has meaning — it identifies the banks that have a large amount of nonperforming loans and it shows the relative risk of those loans to a bank’s capital and reserves (the money it has to cover losses in loans and other assets, such as securities)."

An FDIC spokesman said it does not oppose publishing this kind of data on individual banks, but depositors should not be concerned so long as they stay under those maximum amounts protected by FDIC insurance.

"It's public information," said Andrew Gray, FDIC director of public affairs. "I think there are a lot of different metrics for looking at the health of an institution. I can't say there's one true metric that is a good measure of a bank's health, because there's a variety of different factors, and there's also confidential supervisory inforamtion that only the regulators have access to.

"It's another indication that depositors should be very aware of their deposit insurance coverage and whether they're underneath deposit insurance limits."

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