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'Texas Ratio' Falls Short as Tool.(Special Report)
New York-For years, regulators have relied on the "Texas ratio" to get a quick read on the health of banks.
But A.M. Best's researchers say that in today's economy, the Texas ratio may not be the best way to get a read on the pulse of a banking institution.
And deterioration in the housing and mortgage markets is one factor undermining the Texas ratio's diagnostic accuracy.
The Texas ratio is nonperforming loans divided by the sum of total equity and loan loss reserves. Essentially, it weighs a bank's bad loans against the bank's cushion against losses.
But since earnings are a bank's first line of defense against credit losses, A.M. Best says that earnings capacity provides an additional layer of support. Despite the weak economy, 81%, continue to post a positive return-on-assets.
But because neither housing markets nor the general economy appear poised to rebound in the next few quarters, Texas ratios and earnings are likely to remain under strain, A.M. Best said.
Analyst Khanh Vuong, co-author of an A.M. Best report on the subject, said that the Texas ratio was widely used by regulators during the last banking ...
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Source: HighBeam Research, 'Texas Ratio' Falls Short as Tool.(Special Report)